ATHERTON CAPITAL INC, S-1, 1998-06-03

ATHERTON CAPITAL INC
S-1, 1998-06-03

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NO. 333-

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
ATHERTON CAPITAL INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

---------------

<TABLE>
<CAPTION>
DELAWARE 6162 94-3263361
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

1001 BAYHILL DRIVE, SUITE 155
SAN BRUNO, CA 94066
(650) 827-7800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS PRINCIPAL EXECUTIVE OFFICES)
---------------
DAVID L. ELDER
CHIEF EXECUTIVE OFFICER
ATHERTON CAPITAL INCORPORATED
1001 BAYHILL DRIVE, SUITE 155
SAN BRUNO, CA 94066
(650) 827-7800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
ALAN K. AUSTIN, ESQ. MARK R. LEVIE, ESQ.
BRIAN C. ERB, ESQ. LAWRENCE T. KANE, ESQ.
WILSON SONSINI GOODRICH & ROSATI ORRICK, HERRINGTON & SUTCLIFFE LLP
PROFESSIONAL CORPORATION OLD FEDERAL RESERVE BANK BUILDING
650 PAGE MILL ROAD 400 SANSOME STREET
PALO ALTO, CA 94304-1050 SAN FRANCISCO, CA 94111-3143
(650) 493-9300 (415) 392-1122
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
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CALCULATION OF REGISTRATION FEE

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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE (1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value....... $60,000,000 $17,700
</TABLE>

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to completion, dated June 3, 1998
dated , 1998

[LOGO]

Common Stock

All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being issued and sold by Atherton Capital Incorporated (the
"Company"). Prior to this Offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial
public offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application has been made to list the Common
Stock for quotation on the Nasdaq National Market under the symbol "ATHR".

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share..................................... $ $ $
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Total (3)..................................... $ $ $
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</TABLE>
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(1) The Company and certain selling stockholders (the "Selling Stockholders")
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to additional shares of Common Stock
solely to cover over-allotments, if any, at the Price to Public less the
Underwriting Discount. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."

The shares of Common Stock are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates for such shares of Common Stock will be made
at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about
, 1998.

Piper Jaffray Inc. PaineWebber Incorporated
<PAGE>

[Set forth on this page is a map of the United States indicating (i) the
Company's 12 locations (including the Company's home office) which service six
regions encompassing the entire United States and (ii) the location of
franchise units financed by the Company.]

----------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK
TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE UNDERWRITING.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) reflects the 1000-for-one split of
the Company's Common Stock effected in October 1997 and (iii) reflects the
filing, to be effected concurrently with the Offering being made hereby, of an
Amended and Restated Certificate of Incorporation, providing for, among other
things, the authorization of 5,000,000 shares of undesignated preferred stock
(the "Preferred Stock"). In this Prospectus, unless the context otherwise
indicates, references to "Atherton" or the "Company" are to Atherton Capital
Incorporated, a Delaware corporation, and its predecessor, Atherton Capital
Partners, L.P., a California limited partnership.

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
set forth in this Prospectus.

THE COMPANY

COMPANY OVERVIEW

The Company is a leading specialty commercial finance company engaged in the
business of financing seasoned, multi-unit operators of established national
and regional franchise concepts. The Company initially focused on providing
financing to franchisees of quick service restaurant concepts, such as Burger
King, Wendy's and Taco Bell. The Company has expanded its business to encompass
other franchise industries, including casual and family dining concepts, such
as Denny's and TGI Friday's; specialty retail concepts, such as Midas,
Blockbuster and Jiffy Lube; and retail energy concepts, such as Amoco and
Citgo. The Company offers diverse and flexible loan products designed to meet
the varied financing needs of franchise operators, including store
refinancings, acquisitions of existing units, new store construction, real
estate acquisitions, store improvements and equipment purchases. The Company
underwrites franchise loans primarily on the basis of sustainable cash flow and
enterprise value (the price an independent prospective buyer would pay for the
operating business) rather than on the more traditional basis of the value of
real estate and personal property collateral.

The Company originates fixed and floating interest rate loan products through
12 locations which service six regions encompassing the entire United States.
The Company's loans have been funded primarily through the Warehouse Line of
Credit (the "Warehouse Line") and the Subordinated Debt Facility (the
"Facility") provided by Koch Industries, Inc. ("Koch") through its wholly-owned
subsidiary, Franchise Finance Corp. ("FFC"). From the Company's inception
through March 31, 1998, the Company has funded more than $395.8 million in
loans with an average loan size of approximately $661,000. Annual loan
originations grew to $179.5 million in 1997, up from $114.2 million in 1996.
Loan growth continued during the first quarter of 1998, with total originations
of $92.9 million, compared to $21.0 million during the first quarter of 1997.
At March 31, 1998, the Company had four loans to two borrowers amounting to
$2.3 million, or less than 1% of all loans in the Company's servicing
portfolio, more than 30 days delinquent and had no loans more than 60 days
delinquent. From its inception through March 31, 1998, the Company has
experienced no charge-offs.

The Company sells loans primarily to institutional investors through
securitization transactions. To date, the Company has securitized 30.9% of all
loans originated and, beginning in the second quarter of 1998, intends to
effect securitization transactions on a quarterly basis. There can be no
assurance, however, that the Company will be able to complete securitizations
quarterly, or at all. As of March 31, 1998, the Company held $259.1 million of
loans for sale, including construction loans. The Company also acts as the
servicing advisor for its securitized loans and receives a servicing fee for
such services. The Company's founders, David L. Elder and Arthur P. Brazy, Jr.,
have worked together since 1992 developing securitizable loan products for
franchisees.

3
<PAGE>

The Company attributes its loan origination and revenue growth to its (i)
franchise industry experience, (ii) innovative financial product offerings,
(iii) strong relationships with franchisors and franchisees throughout the
country, (iv) extensive proprietary databases, (v) proven risk management and
underwriting methodologies, (vi) superior customer service and (vii)
securitization expertise.

INDUSTRY OVERVIEW

Franchised businesses encompass a wide range of retail industries, including
restaurants, retail gas outlets ("RGOs"), automotive services and other
specialty retail concepts. In 1997, franchised businesses operated one out of
every 12 business establishments in the United States and generated
approximately $800 billion, or 40%, of all retail sales, according to the
International Franchise Association ("IFA"). According to the IFA, there are
more than 550,000 franchises in the United States employing more than 8 million
persons.

Franchised concepts approved by the Company share many of the same
characteristics, including large numbers of units, strong unit level
performance and standardized operations. The restaurant industry, which
generally can be divided into two segments, quick service restaurants ("QSRs")
and full service restaurants (which include family and casual dining concepts),
is one of the largest components of the franchise market. Revenues in the
restaurant industry in 1997 totaled approximately $215 billion, or
approximately two-thirds of food service sales that year, according to the
National Restaurant Association. Similarly, the RGO market consists of a
significant number of operating units with over 180,000 retail locations,
including gasoline/convenience stores, traditional service stations and truck
stops, according to National Petroleum News. Specialty retail franchise
concepts, such as automotive service providers, exhibit the same attributes as
restaurant franchise concepts and RGO concepts. According to the Automotive
Parts and Accessories Association, the retail automotive services industry had
over $151 billion in annual sales in 1997.

Historically, the alternatives available to franchisees seeking to finance
their business operations have been limited, and available sources of financing
have often imposed significant restrictions on borrowers. In the early 1990s, a
new generation of franchise lenders emerged, consisting of a small number of
specialty commercial finance companies dedicated to financing franchisees in a
more efficient and cost effective manner than traditional bank and finance
company lending sources. The Company believes that there will be increasing
demand for franchise loan products as a result of expected strong growth rates
and certain trends in franchise industries, including acquisition, enhancement
and refranchising of stores by franchisors and continued consolidation among
franchisees.

BUSINESS STRATEGY

The Company's goal is to be the leading financial resource for the franchise
industry. The Company is committed to quality loan originations, product
innovation, superior customer service and maximization of stockholder value.
The following strategic elements are integral to the Company's success in
achieving its goal:

Increase Lending to Existing Markets. The Company intends to continue to
leverage its brand name, reputation for competitive prices and quality service
in order to expand its market share in the restaurant and specialty retail
franchise lending segments. The Company believes that recent growth in the
restaurant and specialty retail segments, along with continued trends toward
refranchising of units currently owned by franchisors and consolidation among
franchisees, will create additional financing opportunities for the Company.

Expand into New Franchise Markets. The Company has identified as potential
expansion opportunities several franchise market segments which exhibit
characteristics similar to those of its existing client base, such as large
numbers of franchise units, significant funding requirements, strong unit level
cash flows, standardized operations and a lack of alternate competitive funding
sources. The Company believes it is well-positioned to offer its franchise
finance products to other largely underserved segments of various franchise
industries.

Develop Additional and Improve Existing Financial Products. The Company
intends to continue its development of new, more flexible financial products
and lending programs that are specifically tailored to meet

4
<PAGE>

the needs of franchisees in a variety of franchise systems. The Company also
intends to continue to improve its existing products in response to evolving
borrower needs.

Diversify Revenue Sources. The Company intends to explore other strategies
for revenue growth and diversification, including the acquisition of existing
loan portfolios, the offering of advisory services within the franchise
industry and the development of lease, vendor and distributor financing
programs.

Provide Superior Customer Service. The Company believes that a key to its
success has been its responsiveness to customer needs and the quality of its
personnel. To enhance customer service, the Company has made investments in
loan origination infrastructure and high quality underwriting, closing,
documentation and servicing personnel, while outsourcing administrative
functions in order to focus on its core competencies.

Maintain High Credit Standards. Management emphasizes high credit quality
standards in order to achieve strong loan portfolio performance. The Company's
expertise in analyzing industries, concepts, borrowers and transactions will be
important as it continues to expand into new market segments and introduce new
products.

Improve Borrowing Spread and Diversify Funding Sources. The Company
continually seeks to reduce its funding costs and diversify its warehouse
funding sources. Currently, the Company is negotiating to obtain additional,
lower cost warehouse facilities. There can be no assurance, however, that the
Company will succeed in obtaining additional credit facilities on favorable
terms, or at all.

Improve Secondary Market Execution. The Company is committed to maintaining
effective secondary market execution on the loans it originates and sells. The
Company believes that its favorable securitization execution has resulted
primarily from the credit quality and attractive terms of the loans it
originates. In addition, the Company acts as the servicing advisor for the
loans it has securitized, providing a liaison between the secondary market and
its customers.

5
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by
the Company (1).......... shares
Common Stock to be
outstanding after this
Offering................. shares (1)(2)
Use of Proceeds........... The Company intends to use the net proceeds to fund future
loan originations, for general corporate purposes and to
reduce outstanding borrowings under the Warehouse Line and the
Facility. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol............ "ATHR"
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment option.

(2) Based on shares outstanding as of March 31, 1998. Excludes an aggregate of
(i) 2,323,100 shares of Common Stock reserved for issuance pursuant to the
Company's 1997 Stock Plan, of which options to purchase 1,614,987 shares at
a weighted average exercise price of $1.43 were granted to officers and
employees of the Company in October 1997, and (ii) shares of Common
Stock reserved for issuance pursuant to the Company's Employee Stock
Purchase Plan. See "Management -- 1997 Stock Plan," "-- Employee Stock
Purchase Plan," "Description of Capital Stock" and Notes 3 and 13 of Notes
to Financial Statements.

RISK FACTORS

Prospective investors should consider carefully the information contained
under "Risk Factors," as well as the other information and data included in
this Prospectus, for certain considerations relevant to evaluating an
investment in the shares of Common Stock offered hereby.

6
<PAGE>

SUMMARY FINANCIAL AND OTHER DATA

The following summary financial and other data should be read in conjunction
with the Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. The statement of operations data for the fiscal years ended
December 31, 1997 and 1996, and for the period from February 10, 1995 (the
inception date of Atherton Capital Partners, L.P. ("ACP")) to December 31,
1995, are derived from the financial statements of the Company and ACP, the
Company's predecessor. Such statements have been audited by KPMG Peat Marwick
LLP, independent auditors, and are included elsewhere in this Prospectus. The
statement of operations data of the Company for the three months ended March
31, 1998 and 1997 and the balance sheet data as of March 31, 1998 are derived
from unaudited financial statements of the Company included elsewhere in this
Prospectus. The operating results for the three months ended March 31, 1998 and
1997 are not necessarily indicative of the results to be expected for any other
interim period or any other future fiscal year.

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED PERIOD FROM
MARCH 31, DECEMBER 31, INCEPTION TO
---------------------- ------------------ DECEMBER 31,
1998 1997 1997 1996 1995
---------- ---------- ---------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans
(1)................... $ -- $6,833 $6,833 $ -- $ --
Net interest income.... 768 360 2,192 865 55
Processing fee income
(2)................... 1 8 17 392 --
Loan servicing income.. 43 60 291 179 52
Other income........... 16 1 177 -- 12
---------- ---------- ---------- ------- -------
Total revenues...... 828 7,262 9,510 1,436 119
Expenses:
Salaries and benefits.. 598 242 2,091 875 740
Provision for loan
losses................ 300 -- 200 -- --
General and
administrative........ 655 362 1,994 1,235 805
---------- ---------- ---------- ------- -------
Total expenses...... 1,553 604 4,285 2,110 1,545
---------- ---------- ---------- ------- -------
Income (loss) before tax
and minority interest.. (725) 6,658 5,225 (674) (1,427)
Income tax expense
(benefit).............. (265) 2,861 2,339 -- --
---------- ---------- ---------- ------- -------
Income (loss) before
minority interest...... (460) 3,797 2,886 (674) (1,427)
---------- ---------- ---------- ------- -------
Minority interest....... -- -- -- 585 --
---------- ---------- ---------- ------- -------
Net income (loss)....... $ (460) $3,797 $2,886 $(1,259) $(1,427)
========== ========== ========== ======= =======
Net income per share--
basic.................. $ (0.02) $ 0.18 $ 0.13
Net income per share--
diluted................ $ (0.02) $ 0.17 $ 0.12
Weighted average common
shares outstanding --
basic................. 23,231,000 20,718,000 22,611,356
========== ========== ==========
Weighted average common
shares outstanding --
diluted............... 24,845,987 22,332,987 24,226,343
========== ========== ==========
</TABLE>
- --------
(1) Gain on sale of loans for the three months ended March 31, 1997 and the
year ended December 31, 1997 includes $1.8 million of cash gains received
at the time of sale. Loan origination fees recognized as a component of the
gain on sale of loans generated $1.5 million of cash which was received at
the time the loans were originated.

(2) In 1997, the Company adopted FAS 125 "Accounting for Transfers of Servicing
and Financial Assets and Extinguishments of Liabilities" which allowed the
Company to recognize a gain on the sale of loans at the time of
securitization (see footnote (1) above). Prior to adoption of FAS 125, the
Company recognized loan fees collected at the time of origination as
processing fee income.

7
<PAGE>

<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -------------------------
1998 1997 1996 1995
--------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ 608 $ 762 $ 1,620 $ 733
Loans held for sale (including construction
loans).................................... 259,098 167,690 98,633 --
Loans held for investment.................. 917 1,284 -- --
Retained interest in loan securitizations.. 4,086 3,950 -- --
Accrued interest receivable................ 1,748 1,254 653 --
Capitalized servicing rights............... 841 879 143 183
Other assets............................... 1,253 1,055 613 724
-------- -------- -------- ------
Total assets............................. 268,551 176,874 101,662 1,640
Warehouse line............................. 247,620 160,231 94,542 --
Subordinated debt facility................. 8,478 4,182 4,716 --
Deferred income taxes...................... 1,937 2,202 -- --
Other liabilities.......................... 3,046 2,452 1,025 143
-------- -------- -------- ------
Total liabilities........................ 261,081 169,067 100,283 143
-------- -------- -------- ------
Minority interest.......................... -- -- 87 --
-------- -------- -------- ------
Partners' capital.......................... -- -- 1,292 1,497
Common stock............................... 23 23 -- --
Additional paid-in capital................. 6,746 6,746 -- --
Deferred compensation...................... (1,724) (1,847) -- --
Retained earnings.......................... 2,425 2,885 -- --
-------- -------- -------- ------
Total partners' capital/stockholders'
equity.................................... $ 7,470 $ 7,807 $ 1,292 $1,497
======== ======== ======== ======
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS PERIOD FROM
ENDED ENDED YEAR ENDED DECEMBER 31, INCEPTION TO
MARCH 31, MARCH 31, ------------------------ DECEMBER 31,
1998 1997 1997 1996 1995
------------ ------------ ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING
STATISTICS:
Loan Originations:
Total loan
originations.......... $ 92,881 $ 20,992 $ 179,453 $ 114,171 $9,375
Average initial
principal balance per
loan.................. $ 641 $ 617 $ 667 $ 660 $ 781
Weighted average
interest rate:
Fixed rate loans...... 8.51% 9.75% 9.93% 9.83% 9.56%
Floating rate loans... 9.00% 10.38% 9.65% -- % -- %
Loan sales:
Original principal
balance of loans sold
through
securitization........ $ -- $ 99,809 $ 99,809 $ 22,415 $ --
Loans held in servicing
portfolio.............. $368,063 $134,828 $ 278,585 $ 119,049 $9,355
Loans more than 30 days
delinquent as a
percentage of servicing
portfolio.............. 0.6% -- % 0.2% 0.4% -- %
Loans more than 60 days
delinquent as a
percentage of servicing
portfolio.............. -- % -- % -- % -- % -- %
Loans more than 90 days
delinquent as a
percentage of servicing
portfolio.............. -- % -- % -- % -- % -- %
Charge-offs as a
percentage of servicing
portfolio.............. -- % -- % -- % -- % -- %
</TABLE>

8
<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves various
risks. Prior to investing in the Common Stock being offered hereby,
prospective investors should consider carefully the factors set forth below,
together with the other information set forth in this Prospectus. Certain
information contained in this section and elsewhere in this Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors set forth in
this section and elsewhere in this Prospectus.

SUBSTANTIAL NEED FOR LIQUIDITY TO FUND LENDING ACTIVITIES

The Company has an ongoing need to finance its lending activities, which are
expected to increase to the extent that the volume of loan originations
increases. The Company's primary operating cash requirements will include the
funding of (i) permanent loans pending sale, construction loans and delinquent
or defaulted loans pending liquidation, (ii) fees and expenses incurred in
connection with its securitization program, (iii) overcollateralization,
reserve account requirements or other credit enhancement costs in connection
with securitized loans, (iv) interest, fees and expenses associated with the
Warehouse Line and the Facility with FFC and any other line of credit or
similar facility into which the Company may enter in the future, (v) federal
and state income tax payments and (vi) ongoing administrative and other
operating expenses, including expenses incurred in connection with loan
workouts. The Company currently funds its cash requirements primarily through
securitizations, borrowings from FFC under the Warehouse Line and the
Facility, origination fees, servicing advisor fees and interest on loans held
by the Company.

The Company uses borrowings under the Warehouse Line and the Facility to
fund its loan originations. Such borrowings are secured by loans originated
and held by the Company. There can be no assurance that the Company will be
able to continue to meet its debt service obligations resulting from
borrowings and, to the extent that it cannot, the Company risks the loss of
some or all of the assets securing its debt.

Warehouse lines of credit are generally of short maturity, and accordingly
the Company must renew or replace them from time to time. The Warehouse Line
and the Facility will each expire and all borrowings thereunder will become
due and payable on December 31, 1999. There is no assurance that the Company
will be able to renew the Warehouse Line or the Facility on a timely basis, on
acceptable terms, or at all. See "-- Significant Reliance on Relationship with
Koch Industries." The Company is currently negotiating additional warehouse
lines of credit with third party lenders, but there can be no assurance that
financing through borrowings in an amount sufficient to satisfy the Company's
future cash requirements will be available on acceptable terms, if at all.

In addition, there can be no assurance that the Company will have access to
the capital markets in the future for equity or debt issuances or for
securitizations. The Company's inability to access the capital markets or
obtain acceptable financing would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SUBSTANTIAL DEPENDENCE ON SECURITIZATIONS

General

The Company currently sells through securitization transactions
substantially all of the loans that it originates. In general, the Company's
securitizations involve the sale of a pool of loans on a non-recourse basis to
a special purpose entity ("SPE"). The SPE issues securities evidencing
interests in the loan pool which are purchased by institutional investors.
Such securities may be issued in multiple classes that have been assigned
ratings by nationally recognized credit rating agencies reflecting the
relative rights of each of the rated classes to receive payments. Although the
Company originates and acts as the servicing advisor for the loans that it
securitizes, legal and beneficial ownership of securitized loans is held by
the issuing SPE, and such loans serve

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as collateral for the securities issued by the SPE. The assets of the SPE are
not available to pay creditors of the Company. The Company's ongoing interest
in such assets is generally limited to its retained interests, including (i)
overcollateralization amounts and (ii) servicing advisor fees.

Although the Company sells the underlying loans to a SPE in its
securitizations, because the SPE may pay dividends or make other distributions
to the Company, and because the Company owns, directly or indirectly, all the
equity interests in the SPE, the Company continues to be subject to risks of
delinquencies, prepayments and charge-offs of the securitized loans.

While the Company intends to complete loan securitizations on a quarterly
basis, there can be no assurance that the Company will be able to complete
securitizations quarterly, or at all. The Company will be required to
originate loans of sufficient volume in order to meet its planned loan
securitization schedule. In addition, certain other factors described below,
some of which are beyond the Company's control, affect the Company's ability
to complete securitizations of its loans. The Company's inability to originate
loans of sufficient volume or on a timely basis, or any adverse changes in any
of the factors set forth below, could impair the Company's ability to
securitize loans, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Specifically, the Company's failure to complete a planned securitization in
any future quarter would have a material adverse effect on the Company's
results of operations for that quarter. See "-- No Prior Public Market;
Possible Volatility of Stock Price."

Risks Associated with Calculation of Gain on Sale

The "gain on sale" associated with securitizations and loan sales is the
largest component of the Company's revenues. In addition, the Company
establishes retained interests in loan securitizations as a balance sheet
asset item, which is amortized based on the estimated cash flows over the
remaining terms of the securitized loans. The gain on sale of loans in a
securitization is computed as the excess of the cash received and assets
retained over the carrying value of the loans sold, less transaction costs.
The fair value of retained interests in loan securitizations is computed as
the present value of the estimated cash flows associated with the retained
interests, using a discount rate and prepayment and credit loss assumptions.
Of the $6.8 million gain on sale from securitizations recognized by the
Company in 1997, $1.8 million was comprised of cash received by the Company at
the time of securitization. The remaining $5.0 million gain on sale
represented the present value of anticipated cash flows on retained interests
and fee income previously received in cash and deferred until the time of the
loan sale. Depending upon the securitization structure and execution of the
transaction, in future transactions the Company may not receive some or all of
the cash representing the gain on sale of the securitization until payments
are received on the securitized assets, or may never receive some or all of
such cash. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview -- Accounting for Gain on Sale of Loans;
Retained Interests in Loans Sold" and "-- Liquidity and Capital Resources."

The anticipated payments to the Company or its subsidiaries on the retained
interests in a loan securitization are discounted at a specified rate and
further reduced by the Company's estimate of future credit losses and loan
prepayments over the remaining terms of the securitized loans. To date, in
discounting anticipated cash flows to be released to the Company from the SPE
(cash out method) on its retained interests in securitized loans, the Company
generally (i) has used an effective annual discount rate of 12%, (ii) has
assumed an annual default rate equal to 0.5% of the outstanding principal
balance of its loans, with an assumed 50% recovery rate on defaulted loans 24
months subsequent to the date of default and (iii) has assumed an annual
prepayment rate of 5% of the then outstanding principal balance of the
securitized loans. If prevailing interest rates rise, the Company may need to
increase the required discount rate used in determining the value of retained
interests in securitizations, thus reducing the Company's gain on sale. In
addition, the Company would record an expense, reducing the carrying value (on
a consolidated basis) of retained interests in prior loan securitizations. The
actual rate of credit losses and prepayments are influenced by a variety of
economic and other factors, including general economic conditions and business
competition. Accordingly, there can be no assurance that the actual rate of
credit losses and prepayments on the loans sold in the Company's
securitizations will not exceed the Company's estimates or

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historical experience. If actual credit losses and prepayments exceed the
Company's estimates, the Company would be required to record an expense in a
future period or periods, reducing the carrying value (on a consolidated
basis) of retained interests in loan securitizations. There can be no
assurance that future changes in the Company's securitization structures,
interest rates or future credit loss and prepayment levels will not result in
losses which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

Although it records a gain on sale at the closing of a securitization, the
Company is permitted to defer actual payment of taxes on such gain until cash
is actually received from borrowers. To the extent that the Company is unable
to defer such taxes in future securitization transactions or is required by
the Internal Revenue Service to accelerate the payment of taxes which
previously had been deferred, the Company's liquidity, and thus its ability to
pursue its growth strategy and to fund its future loan origination and
securitization activities, may be adversely affected.

Timing Risks

The Company has completed two securitizations since its inception in
February 1995. Beginning in the second quarter of 1998, the Company intends to
effect securitization transactions on a quarterly basis, but there can be no
assurance that the Company will be able to do so. Market and other
considerations such as the volume and timing of loan originations affect the
timing of such transactions and may cause the Company's results of operations
to fluctuate accordingly. Any delay in the sale of a loan pool beyond a
quarter-end would postpone the recognition of gain related to such loans and
may result in the Company's reporting losses for such quarter. See "-- No
Prior Public Market; Possible Volatility of Stock Price" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Execution Risks

In order to securitize its loans on favorable terms, the Company must obtain
ratings for its securities from nationally recognized credit rating agencies.
The Company's inability to obtain ratings for its securities would likely
cause the Company's costs of securitization to increase and its gain on sale
resulting from such securitization to decrease, and could result in an
inability to sell its securities. The Company may rely on credit enhancements
purchased from monoline insurance companies to enable it to obtain the
necessary credit ratings. The unwillingness of insurance companies to
guarantee payment of principal and interest on the Company's securitized
loans, or the Company's inability to obtain such insurance coverage on
advantageous terms, could have a material adverse effect on the Company's
ability to securitize loans on favorable terms, if at all.

To the extent there is a decrease in the credit quality of loans originated
by the Company or similar loans originated by its competitors, the ability of
the Company to obtain ratings and securitize or sell loans may be adversely
affected. Even if the Company is able to obtain such ratings, rating agencies
may require that a higher proportion of the securities issued in the Company's
securitizations be subordinated, thus decreasing the proceeds earned by the
Company. Moreover, an adverse change in the performance of loan pools
securitized by the Company or similar loan pools securitized by its
competitors could also adversely affect the Company's ability to obtain
ratings and to securitize or sell loans. In addition, to the extent that the
Company makes loans in new market segments or to different types of entities
in existing market segments, there is a risk that such loans will not be
securitizable or will be securitizable only on terms that are not advantageous
to the Company.

Substantially all of the Company's loans contain provisions that discourage
prepayment of such loans. Prepayment provisions included in a majority of the
Company's fixed rate loan documents provide for a prepayment fee in an amount
sufficient to compensate the Company or investors in the Company's
securitizations for the difference in their yield upon reinvestment of the
prepayment proceeds and the expected yield to maturity of the loan. Prepayment
penalties included in the documents governing the Company's other loans,
however, are less severe. Prepayment restrictions on the Company's loans can,
but do not necessarily, provide a deterrent to

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<PAGE>

prepayments. If actual prepayments materially exceed Company estimates, the
carrying value of the Company's retained interests in loan securitizations may
decrease, and the Company may be unable to effect future securitizations on
terms similar to its recent securitizations, if at all.

Market Risks

The securitization market for the Company's loans is relatively undeveloped
compared to the securitization market for other types of loans, and may be
more susceptible to market fluctuations or other adverse changes than more
developed capital markets. Conditions in the securities markets in general and
conditions in the asset-backed securities market specifically affect the
Company's ability to securitize or sell loans.

Any substantial reduction in the size, pricing or availability of the
securitization market for the Company's loans, for whatever reason, would have
a material adverse effect on the Company's business, financial condition and
results of operations.

SIGNIFICANT RELIANCE ON RELATIONSHIP WITH KOCH INDUSTRIES

The Company's relationship with Koch and FFC is significant in a number of
respects. FFC is a wholly-owned subsidiary of Koch, a privately held, multi-
national industrial and financial services company. Koch, through FFC,
provides a total of $320 million (which amount will decrease to $270 million
in October 1998) in revolving credit to the Company through the Warehouse Line
and the Facility. In addition, Koch currently provides all of the Company's
interest rate swaps. Koch, through FFC, owns approximately 35% of the
Company's outstanding Common Stock prior to this Offering, and an FFC
designee, Jeffrey R. Thompson, serves as a director of the Company.

There can be no assurance that Koch will retain its equity interest in the
Company or that it will continue to provide financing or interest rate swaps
to the Company. If Koch were to divest its equity interest in the Company, it
may have less incentive to continue to provide financing or interest rate swap
transactions to the Company. If Koch decides not to renew the Warehouse Line
or the Facility upon their expiration on December 31, 1999 or to discontinue
providing swaps, the Company would be required to find alternative sources for
its financing and interest rate risk management. The Company is currently
negotiating to obtain additional warehouse lines of credit, but there can be
no assurance that such alternative financing will be available on acceptable
terms, if at all. To the extent that the Company is unable to obtain
alternative financing, it may have to curtail its loan origination activities.
To the extent that the Company is unable to obtain interest rate swaps, it
will be exposed to a substantially increased risk of financial loss resulting
from interest rate fluctuations. For these reasons, termination of the
Company's relationship with Koch could have a material adverse effect on the
Company's business, financial condition and results of operations.

LOAN UNDERWRITING AND CREDIT QUALITY RISKS

Loans are held in the Company's portfolio pending their sale or
securitization, and certain loans may be held by the Company until maturity.
In addition, the Company earns fees by acting as the servicing advisor on such
loans. To the extent that the Company receives servicing advisor fees for the
loans it originates, or a subsidiary of the Company retains an interest in
loans that have been securitized, the Company is exposed to underwriting and
credit quality risk on such loans.

Reliance on Loans to Franchisees

Loans to franchisees generally involve all of the risks associated with
small business loans. The ability of a borrower operating as a franchisee to
repay its loan is subject to general business risks typically associated with
operating a business and particularly with operating a franchised business
(many of which are beyond the control of any borrower), including, without
limitation, (i) an increase in the cost of labor, products or other essential
supplies, (ii) a decrease in the consumer demand for a particular product or
class of products offered by a

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<PAGE>

particular franchise concept, (iii) adverse changes in the economy in the
geographic location in which a particular franchise unit is located, (iv)
changes in the law, including, without limitation, mandatory increases in the
minimum wage payable to employees, (v) the brand recognition and strength of
the franchise system of a particular franchisee, (vi) competition among
franchisees within a particular industry and (vii) the management and key
personnel of a particular franchisee.

DEPENDENCE ON FRANCHISOR AND SYSTEM. The success of the business of a
franchisee is largely dependent upon brand recognition and the strength of the
franchise system in which it operates. While all of the Company's loans have
been made to borrowers within systems approved by the Company, and the
approval of a system is based on, among other things, the historical
performance of the system, the strength of the franchisor and the support
which it provides to the system, there is no assurance that the prior
performance of any system will be indicative of future results, or that any
franchisor will continue to have its present strength or continue to provide
its present level of support for its system. In addition, the fact that brand
name recognition and system support provides much of the basis for the
successful operation of individual franchise businesses can also mean that
changes or problems affecting a franchisor, a system in general or certain
locations within a system can have a substantial negative impact on the
operations of otherwise successful individual franchise units. In addition,
changes in the requirements placed by the franchisor on its franchisees can
negatively impact the operating performance of a borrower within a system.

PARTICULAR RISKS OF FRANCHISEES IN THE RETAIL ENERGY INDUSTRY. Franchisees
operating in the retail energy industry are often dependent upon supply
agreements with national retail petroleum companies which require such
franchisees to purchase all or a portion of their petroleum product
requirements from such companies. These agreements may also contain terms
which require franchisees to pay additional costs to their suppliers in the
event such franchisees fail to achieve certain target earnings or to make
additional payments to suppliers if such franchisees do not purchase a
specified minimum amount of product per year. If a franchisee does not meet
its target earnings and/or minimum purchase requirements, the cost to such
franchisee of petroleum products could increase substantially, and such
franchisees' profit margins and consequently its ability to repay its loans
could be adversely affected.

In addition, the operation and management of retail energy businesses
involves the use and limited storage of certain hazardous materials. The
Company's loans may be secured by convenience store and gas station locations
with underground storage tank systems ("USTs") and other environmental risks.
Under various federal, state and local laws, ordinances and regulations,
various categories of persons, including owners, operators or managers of real
property may be liable for the costs of investigation, removal and remediation
of hazardous substances that are or have been released on or in their property
even if such releases were by former owners or occupants. Any liability of
franchisees for assessment and remediation activities in connection with
releases into the environment of gasoline or other regulated substances from
USTs or otherwise at such franchisees' gasoline facilities could adversely
impact franchisees' ability to repay any loans from the Company or the value
of any pledged collateral.

Uncertainty of Business Valuation

The Company underwrites its franchise loans primarily on the basis of
sustainable cash flows and enterprise value (the price an independent
prospective buyer would pay for the operating business) rather than solely on
the basis of the value of real estate and personal property collateral
attributable to the related store. The enterprise value is determined by
third-party valuation consultants utilizing a valuation methodology that
generally takes into account an analysis of historical sales and cash flow
data, operating statements, site inspections, management interviews and a
database of comparable transactions which indicates a valuation range relative
to sales and cash flow margins for stores within a specific franchise concept.
Because small businesses are typically privately owned, there is generally no
publicly available information about such companies, and the Company must rely
on its employees and agents to obtain information regarding potential
borrowers in connection with the Company's lending decisions. While publicly
available information permits the Company to perform certain risk

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<PAGE>

analysis concerning the default, failure and closure risks within industries
and among franchise systems, generally there is no assurance that the
available information correctly reflects the risks associated with lending to
borrowers in an industry or concept or to any specific borrower within any
industry or concept.

There can be no assurance that any valuation performed or received by the
Company in connection with any loan actually reflects an amount that would be
realized upon a current sale of the franchise unit and related personal and
real property. Moreover, such a valuation is not indicative of the value of
the enterprise at any time after the date of the valuation. In that regard,
valuations with respect to each loan are obtained at the time the loan is
originated, and the Company does not regularly perform or commission any
valuations subsequent to the funding of a permanent loan. Future values may
depend upon a variety of factors, including the economic success of the
franchise unit, local and general competitive and economic conditions, as well
as the strength of the relevant franchise system, the franchisor and the
related borrower. In addition, other factors may adversely affect the market
value of collateral without affecting the current net operating income of the
related franchise unit, including changes in government regulations, changes
in health, zoning or tax laws, potential environmental liabilities, or other
legal liabilities and changes in prevailing market rates of interest.
Moreover, it is likely that during the time leading up to a default by a
particular borrower, certain factors may occur to reduce the revenues or cash
flow generated by such borrower's franchise units, and consequently the
enterprise value of such borrower's enterprise may be reduced.

A borrower's franchise agreement is generally not included in the collateral
securing a loan. Accordingly, the Company may not foreclose on the franchise
agreement in the event of a default by the borrower. Because the collateral
securing the Company's loans is often of limited value other than to a party
who has the right to operate the franchise unit, the liquidation value of such
collateral generally will be less than the value of the enterprise as
determined above. Accordingly, in order to realize the full value of the
collateral securing a loan (which may or may not be sufficient to satisfy a
borrower's obligations to the Company), the Company generally will be required
to obtain the cooperation of the franchisor. Because the interests of the
Company and the franchisor may not coincide in the event a borrower defaults,
there can be no assurance that such cooperation will be obtained.

Limitations of Real Estate and Equipment Collateral

A substantial majority of the loans made by the Company are secured by (i) a
security interest in a borrower's franchise unit-related personal property for
a particular location and (ii) a mortgage or deed of trust on a borrower's
interest in the real property upon which the franchise unit operates. The
market value of equipment and certain other collateral of the type securing
the Company's loans generally declines with age, and such equipment and other
collateral may decline substantially in value either suddenly or periodically
as a result of technological advances or changes in franchise system
requirements.

Where a loan is secured by a borrower's ownership interest in the franchise-
related real estate, the Company determines the value of such real property
interest based upon an independent, third-party valuation. The Company's
valuation methodology values the real property on an in-use, income approach
which assumes that the property is in use as an income producing franchise
property. Because the Company's loans are made on a business valuation basis,
the sale or liquidation of the real estate collateral alone generally would
not provide a borrower with sufficient proceeds to satisfy its obligations to
the Company. Moreover, such a valuation is not indicative of the value of a
real property interest at any time after the date of the valuation. Future
values may depend upon a variety of factors, including demographic or physical
changes in the surrounding area, the absence of sufficient non-disturbance
agreements, changes in general or local economic conditions, increases in
interest rates, real estate taxes and other operating expenses (including
energy costs), ingress and egress, changes in governmental rules and
regulations (including environmental rules), acts of God and other factors.
Accordingly, there can be no assurance that the valuation actually reflects
the amount that would be realized upon a current sale of the real property
interest. As a result, if a borrower becomes unable to meet its obligations
under a loan, any amount realized in a liquidation of such borrower's real
property could be substantially less than the amount owed by such borrower to
the Company.

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<PAGE>

Many of the Company's loans are secured by leasehold interests in real
property. Loans secured by a lien on a borrower's leasehold interest in a
property are subject to certain additional risks not associated with loans
secured by a lien on the borrower's ownership interest in such property. The
most significant of these risks would occur if the borrower's leasehold were
to be terminated, in which case the Company would be left without its real
property security. In addition, in cases where a lease, a memorandum of the
lease or an assignment of the lease is not recorded in the public record, the
rights of the borrower and the Company as leasehold mortgagee under the
borrower's lease may be subject to a third party asserting an interest in the
leasehold estate senior to that of the borrower. In such case the Company
could lose its rights in the lease to a third party and be left without its
security.

In addition, in many instances a borrower's leasehold interest in franchise
unit-related real property is of limited value other than to a party that also
has the right to operate the franchise at such location. As a result, in the
event that the Company acquires the borrower's interest in franchise-related
real property through foreclosure or similar proceeding, the Company may be
restricted in the use of such real property and may be unable to succeed to
the rights of a franchisee under the related franchise agreement. Moreover, in
many cases, the real property upon which the franchise unit operates may not
readily be converted to alternative uses in the event that the operation of
such location for its original purposes becomes unprofitable for any reason.
In such cases, the conversion of the locations to alternative uses generally
would require substantial capital expenditures by the Company.

Concentration Risks

The Company may be exposed to certain concentration risks including risks of
(i) franchise concept concentration, (ii) borrower or affiliated borrowers
concentration and (iii) geographic concentration.

The majority of the Company's loans to date have been to franchisees which
operate in the restaurant segment (e.g. Burger King, Wendy's and Taco Bell) or
the specialty retail segment (e.g. Midas, Blockbuster and Jiffy Lube). For the
three months ended March 31, 1998 and the year ended December 31, 1997,
restaurant originations comprised approximately 67.8% and 100%, respectively,
of total loan originations, while specialty retail originations represented
32.2% and 0%, respectively. In the event that any of the included franchise
concepts suffers a material adverse change, the borrower in such franchise
concept would be adversely affected, and there would be a concomitant adverse
impact on each such borrower's ability to repay its obligations to the
Company. In addition, the Company has made loans to a limited number of
borrowers. During the three months ended March 31, 1998, the Company made
loans to one borrower whose loans comprised 37.1% of the Company's total loan
originations during the period and the Company's five largest groups of
affiliated borrowers had loans comprising 82% of the Company's total loan
originations during the period. During the year ended December 31, 1997, the
Company made loans to one affiliated group of borrowers whose loans comprised
19.8% of the Company's total loan originations during the year. The Company's
five largest affiliated groups of borrowers in 1997 had loans comprising 36.9%
of the Company's total originations. To the extent that loans to a particular
borrower or an affiliated group of borrowers constitute a material portion of
the Company's then outstanding loans, the Company could suffer material losses
in the event such borrower or affiliated group defaulted on its loans.
Finally, to date, a substantial majority of the Company's loans have been made
to borrowers operating franchise units in a limited number of geographic
areas. Of total loan originations for the three months ended March 31, 1998,
18.6% were originated in Wisconsin, 17.7% were originated in Michigan, 12.0%
were originated in Minnesota, 10.4% were originated in Texas and 10.1% were
originated in Missouri. Of the total loan originations for the year ended
December 31, 1997, 18.0% were originated in Florida, 11.9% were originated in
Michigan, and 10.6% were originated in California. Of the total loan
originations for the year ended December 31, 1996, 14.8% were originated in
California and 11.0% were originated in Illinois. In the event that any such
state suffers a material adverse change (whether as a result of deteriorating
economic conditions, natural disasters or otherwise), all borrowers in such
state would likely be adversely affected.

Limited Recourse to Principal of Borrowers

Although the terms of the Company's loans provide for recourse against the
borrowing entities, there can be no assurance that the enforcement of such
recourse provisions will be practicable or that the assets of the

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respective borrowers will be sufficient to permit a recovery on a defaulted
loan in excess of the liquidation value of the related collateral. The
borrowers on the Company's loans generally are corporations, limited liability
companies, limited partnerships and other limited liability entities, and the
principals of such borrowers generally are not required to guarantee such
loans personally. As a result, in the event of a default by a borrower, the
shareholders, members, partners or other principals of the defaulting borrower
generally will have no personal liability to the Company.

Limited Covenant Restrictions

The Company's loan agreement with each borrower generally contains only a
limited number of restrictive covenants, including, in certain cases,
covenants to maintain specified liquidity ratios, dividend restrictions and
covenants restricting a borrower's ability to encumber or dispose of the
collateral (other than, among other things, encumbrances in connection with
purchase money financings, certain other permitted encumbrances and
dispositions in the ordinary course of business). The Company's loan
agreements generally do not contain other covenants, such as covenants
requiring maintenance of a minimum loan-to-value ratio, net worth or value of
liquid assets, or covenants restricting or prohibiting distributions. The
absence of such covenants (which are often included in traditional bank
financing agreements) may limit the Company's ability to respond to declining
collateral values and/or to recover amounts in respect of a loan in the event
of a default. Moreover, borrowers may be natural persons or entities, and
entity borrowers are generally not required to be special purpose entities.
Because the Company's loan agreements place only minimal restrictions on
borrowers' business activities, such borrowers remain subject to business,
credit, financial and other risks unrelated to the operations of the franchise
units subject to the Company's loan.

Short-Term Construction Loans

The Company has recently begun to offer short-term construction loans to
certain franchisees to fund the construction of new stores. These loans are
generally converted into permanent loans after the construction is completed.
For the three month period ended March 31, 1998 and the year ended December
31, 1997, construction loans represented 2.0% and 4.6%, respectively, of the
Company's total loan originations. Construction loans have different risks
than the permanent loans originated by the Company, in part because in
underwriting such loans, the Company relies more heavily on the operator's
experience and the strength of the business concept rather than the historical
profitability of the unit. In addition, construction loans involve additional
risks attributable to the fact that loan funds are advanced upon the security
of the business unit under construction, which is of uncertain value prior to
completion and commencement of operations. In the event that construction is
not completed or the business unit does not commence operations successfully,
the collectability of the related loan may be impaired. Finally, no payments
are generally applied to reduce the principal due on construction loans until
they are converted into permanent loans, further increasing the risk of
nonpayment. For these reasons, the Company may be exposed to a greater risk of
loss on construction loans. See "Business -- Loan Products -- Construction
Loans."

The Company does not currently securitize any of its construction loans and
funds such loans primarily with borrowings under the Warehouse Line, and thus
retains a relatively greater proportion of the credit risk of such loans. In
the event that the Company is unable to convert a construction loan at
maturity to a permanent loan and no other lender refinances such loan, the
Company may incur losses upon foreclosure or other collection action. See
"Business -- Loan Products--Construction Loans."

Balloon Loans

Certain of the Company's loans, representing 12.7% of the aggregate
principal balance of loans held for sale as of March 31, 1998, do not fully
amortize over their respective terms to maturity. Thus, each such loan will
have a substantial payment (a "Balloon Payment") due at its stated maturity
unless prepaid prior thereto. Loans with Balloon Payments involve a greater
risk than fully-amortizing loans because the ability of a borrower to make a
Balloon Payment typically will depend upon its ability to refinance the loan
or raise capital from other

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<PAGE>

sources. The ability of a borrower to effect a refinancing will depend on a
number of factors, including the value of the collateral, the level of
available interest rates at the time of refinancing, the financial condition
and operating history of the borrower and the collateral, prevailing economic
conditions, and the availability of credit for loans secured by franchises
generally.

Legal Limitations on Foreclosure Proceedings

The Company's ability to foreclose on collateral securing the Company's
loans is subject to various legal limitations, including those imposed by "one
action" or "election of remedies" rules in various jurisdictions. Such rules
limit the remedies available to secured creditors and prevent secured
creditors from seeking deficiency judgments (i.e., personal judgments) against
defaulting debtors, and thus limit such creditors' recovery on defaulted loans
to the value of the collateral securing such loans. If such a rule is applied
to the Company in a situation where the value of collateral securing a
defaulted loan is less than the amount owed to the Company, the Company could
suffer a substantial loss.

In addition, foreclosure and similar proceedings must be brought in state
court, and the courts of one state cannot exercise jurisdiction over property
in another state. In many cases, loans by the Company to a single borrower or
affiliated borrowers are secured by property located in different states.
Because of variations among state laws, it may be necessary upon a default
under any such loan to foreclose on the related collateral in a particular
order rather than simultaneously in order to ensure that the related mortgages
and security interests are not impaired or released. There can be no assurance
that the Company will in all cases be successful in preserving its security
interests in related collateral located in different states. Moreover, even if
the Company is able to preserve such security interests, its inability to
foreclose simultaneously on all collateral pledged by a single borrower or
group of affiliated borrowers will enhance the ability of such borrower or
borrowers to assert certain borrower defenses or to shield certain collateral
from foreclosure.

Potential Bankruptcy of Borrowers or Franchisors

The bankruptcy of a borrower would impair the Company's ability to realize on
collateral securing a loan and/or to enforce deficiency judgments against a
borrower. In this regard, one of the Company's borrowers has declared
bankruptcy with respect to one franchise property pledged as collateral for a
loan extended by the Company in the amount of $267,000. Among other things, in
the event of a bankruptcy of a borrower, the Company would be stayed from
foreclosing on its collateral and, often, such borrower would be under no
obligation to make interest or principal payments during the course of its
bankruptcy case. Further, under the bankruptcy laws, in certain circumstances,
the amount and terms of a loan held by the Company and secured by a lien on a
borrower's property may be modified. For example, the outstanding amount of
the Company's loan may be reduced to the then-current value of the property
securing the loan, thus leaving the Company a general unsecured creditor for
the difference between such value and the outstanding balance of the loan.
Other modifications may include a reduction in the amount of each scheduled
payment to the Company and/or an extension (or shortening) of the term to
maturity or a reduction in the interest rate on the loan to then-current
rates. Also, a bankruptcy court may permit a borrower, through its
reorganization plan, to reinstate a loan payment schedule even if the Company
has obtained a final judgment of foreclosure prior to the filing of the
borrowers petition in bankruptcy. If a loan made by the Company is secured by
a leasehold mortgage, then in the event of the bankruptcy of the related
borrower, the related lease may be terminated, thus depriving the Company of
its security and potentially rendering the leasehold mortgage valueless.

The bankruptcy of a franchisor or other party upon whom a franchise system
is dependent could also have a substantial negative effect on such franchise
system and/or on the borrowers within such franchise system. In addition, the
bankruptcy of a franchisor could permit such franchisor to elect to terminate
its franchise agreement with a borrower. While the borrower may seek to retain
its rights under the franchise agreement, there is no assurance that such
effort would be successful, and even if it were successful, there would be no
assurance the borrower would be permitted to retain its rights beyond the term
of its original franchise agreement. See "-- Reliance on Loans to
Franchisees -- Dependence on Franchisor and System."

17
<PAGE>

Environmental Liability

The Company performs only a limited amount of environmental investigation in
connection with its loans. With respect to any property securing a Company
loan, absent evidence of an existing environmental problem, the Company does
not perform any investigation beyond the review of certain environmental
reports. Moreover, the Company undertakes very limited investigation on any
other properties that may, due to their geographic proximity to borrowers'
properties, have the potential to affect borrowers' properties. There can be
no assurance that real property owned or leased by borrowers, including the
real property securing the Company's loans, is free of environmental problems.
Contamination by hazardous substances of a borrower's real property may reduce
the value of such borrower's business and impair its ability to repay its
loans. Moreover, contamination of property securing one of the Company's loans
may give rise to a lien on that property to ensure payment of the cost of
clean-up, and, in certain circumstances, may subject the Company to liability.
Under certain state and federal laws, a lender may become liable for cleanup
of a property and adjacent properties that are contaminated by releases from
the property if the lender engages in certain activities. See "Business --
Regulation -- Environmental Laws Affecting Borrowers in Specific Segments."

To the extent the Company makes loans to borrowers in the retail energy
segment, the risk of environmental liability increases. In connection with
such loans, the Company requires that secured creditors' environmental
liability insurance be obtained. See "Business -- Regulation." There can be no
assurance that such insurance or any investigation performed by the Company
will shield it from any environmental liability incurred in connection with
loans to borrowers in the retail energy market.

INTEREST RATE FLUCTUATIONS

The Company's profitability may be adversely affected during any period of
unexpected or rapid changes in interest rates. For example, in an inflationary
economy, interest rates normally increase. A substantial and sustained
increase in interest rates, whether due to inflation or otherwise, could
adversely affect the Company's ability to originate loans. The Company's
profitability may be directly affected by fluctuations in interest rates which
affect the Company's ability to earn a spread between interest received on its
loans held for sale and rates of interest paid by the Company on the Warehouse
Line, the Facility and/or other lines of credit. If prevailing interest rates
rise, the Company may need to increase the required discount rate used in
determining the value of its retained interests in securitizations, thus
reducing the Company's gain on sale. In addition, the Company may be required
to record an expense, reducing the carrying value (on a consolidated basis) of
retained interests in prior loan securitizations.

The Company is required under the Warehouse Line to hedge all of its fixed-
rate loan balances securing the Warehouse Line. The Company's hedging strategy
normally includes acquiring life-of-the-loan interest rate swaps in such
amounts and maturities as to effectively hedge the interest rate volatility of
its portfolio. There can be no assurance that the Company's hedging strategy
will protect the Company from interest rate risks. All of the Company's
interest rate swaps are currently provided by Koch under an interest rate swap
agreement with the Company. Koch, through its subsidiary FFC, holds a
substantial equity interest in the Company and provides loans to the Company
under the Warehouse Line and the Facility. There can be no assurance that FFC
will retain its equity interest in the Company or continue to provide loans to
the Company after the maturity date of the Warehouse Line and the Facility, or
that Koch will continue to provide interest rate swaps to the Company. See "--
Significant Reliance on Relationship with Koch Industries." To the extent
that the Company is unable to obtain such swaps from Koch or another party,
the Company will be exposed to a substantially increased risk of financial
loss resulting from interest rate fluctuations.

DEPENDENCE ON THIRD-PARTY SERVICER

The Company currently outsources the administrative aspects of servicing all
loans it originates (securitized and warehoused) to a third-party servicer.
The Company is dependent on this third-party servicer for the servicing of
loans and has entered into servicing contracts with this third party pursuant
to which such servicer

18
<PAGE>

is paid a monthly fee to perform administrative functions such as collection
of principal and interest payments, distribution of proceeds, monitoring of
insurance requirements, distribution of late payment notices and record
keeping. The Company does not control this third party and there can be no
assurance that it will perform its functions in a timely and adequate manner.
The Company may be liable in certain circumstances for damages caused by the
third party's failure to perform its servicing functions. In addition, there
can be no assurance that this third party, or an alternative third-party
servicer, will be available or willing to perform such day-to-day servicing in
the future on commercially reasonable terms, if at all. To the extent that the
Company has to perform such servicing functions itself, the Company will have
to hire and train additional personnel and reallocate resources, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Loan Servicing and Credit
Quality."

POTENTIAL REPURCHASES OF SECURITIZED LOANS

The Company may be required to repurchase one or more loans sold in a
securitization to the extent that the Company has breached a representation or
warranty made by the Company with respect to such loans at the time of the
securitization. Customary representations and warranties include (i) no
default, breach, violation or event permitting acceleration exists under the
loan documents, (ii) a legal, valid and binding franchise agreement exists
with respect to the related franchise units and (iii) each loan was
underwritten in accordance with the Company's underwriting guidelines. To the
extent that the Company is required to repurchase any loan, it will be exposed
to normal credit risks relating to such loan. See "-- Loan Underwriting and
Credit Quality Risks."

RISKS OF EXPANSION

The Company's continued growth will depend largely upon its ability to
increase its volume of loan originations through increased penetration of the
franchise market segments it currently serves, as well as through expansion
into new franchise market segments, and will require the Company to grow its
operations. The success of this expansion will depend on a number of factors,
including the availability of capital, the ability to attract and retain
qualified marketing executives and other employees, the ability to manage the
growth, the development and/or enhancement of management, information and
operating systems to support expanded activities and general economic and
business conditions. There can be no assurance that the Company will be able
to expand its operations to increase its volume of loan originations on a
timely or profitable basis, or at all or will be able to maintain the loan
performance it has experienced in the past. Any failure of the Company to
increase its loan volume could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Business Strategy."

COMPETITION

As a specialty franchise finance lender, the Company faces intense
competition, primarily from other franchise lenders, commercial banks, thrift
institutions, diversified finance companies, asset-based lenders, specialty
commercial finance companies and real estate investment trusts, among others.
Many of these competitors are substantially larger and have considerably
greater financial, marketing and capital resources than the Company. In
addition, certain of the Company's competitors may have higher risk tolerances
or different risk assessments which could allow them to build market share or
establish lower margin requirements and pricing levels. Competition may also
be affected by fluctuations in interest rates and general economic conditions.
During periods of rising interest rates, competitors that have locked in low
borrowing costs may have a competitive advantage. During periods of declining
rates, competitors may solicit the Company's customers to refinance their
loans. During economic slowdowns or recessions, the Company's borrowers may
experience financial difficulties and may be receptive to offers by the
Company's competitors. Furthermore, the current level of gains realized by the
Company and its competitors on the sale of franchise loans is attracting and
may continue to attract additional competitors into the market with the
possible effect of lowering gains that may be realized on the Company's loan
sales. See "Business -- Competition."

19
<PAGE>

DEPENDENCE ON KEY PERSONNEL

The Company's success depends in large part on the continued service of its
executive officers and other key management, sales and other personnel,
particularly David L. Elder, the Company's Chief Executive Officer, Arthur P.
Brazy Jr., the Company's President, and Mark H. McGourty, the Company's Senior
Vice President and Chief Financial Officer. The Company intends to enter into
employment agreements with Messrs. Elder, Brazy and McGourty. However, such
employment agreements will not guarantee the services of these employees. In
addition, the failure of Messrs. Elder or Brazy to be actively involved in the
Company's business would constitute a breach of the terms of the Facility. The
loss of the services of any of Messrs. Elder, Brazy and McGourty or of other
key personnel could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company does not maintain
"key man" life insurance on any of its employees. The Company's future success
also depends to a significant extent on its ability to identify, attract, hire
and retain additional qualified personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. See "Management" and "Business --
Employees."

CONCENTRATION OF STOCK OWNERSHIP AND CONTROL

Upon completion of this Offering, based on the shares outstanding as of
March 31, 1998, the two founders of the Company, David L. Elder and Arthur P.
Brazy Jr., will beneficially own an aggregate of approximately % of the
outstanding Common Stock (or approximately % if the Underwriters' over-
allotment option is exercised in full). In addition, FFC will beneficially own
approximately % of the outstanding Common Stock (or approximately % if the
Underwriters' over-allotment option is exercised in full). As a result, Mr.
Elder, Mr. Brazy and FFC (the "Principal Stockholders"), if they were to act
together, would be able to control the outcome of substantially all matters
requiring stockholder approval, including the election of the entire Board of
Directors, amendment of the Company's Certificate of Incorporation, mergers,
sales of all or substantially all of the Company's assets and other major
corporate transactions and the response of the Company to any non-negotiated
takeover attempt. In addition, pursuant to a stockholders agreement among the
Principal Stockholders, for so long as FFC owns at least 15% of the Company's
outstanding Common Stock and continues to lend to the Company under the
Warehouse Line, the Principal Stockholders have agreed to elect one FFC
nominee to the Company's Board of Directors. See "Management," "Certain
Transactions" and "Principal Stockholders."

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS

The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibit the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 could have the effect of
delaying or preventing a change of control of the Company. Further, certain
provisions of the Company's Certificate of Incorporation and Bylaws and of
Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. These provisions include advance notice
procedures for stockholders to nominate candidates for election as directors
of the Company, no stockholder action by written consent, limitations on
persons who can call stockholder meetings and supermajority voting procedures
for certain amendments to the Company's Certificate of Incorporation.

Upon completion of this Offering and the filing of the Company's Amended and
Restated Certificate of Incorporation, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
See "Description of Capital Stock -- Preferred Stock" and "-- Certain Anti-
Takeover Effects of Provisions of Delaware Law and the Company's Certificate
of Incorporation and Bylaws."

20
<PAGE>

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public trading
market for the Common Stock will develop or be sustained after this Offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters
and may not be indicative of the market price at which the Common Stock will
trade after the Offering.

The market price of the Company's Common Stock may be highly volatile and
could be subject to wide variations in response to actual or anticipated
quarterly variations in operating results, completion or lack of completion of
loan securitizations, activities by competitors, market conditions in the
commercial finance industry and changes in financial estimates by equity
research analysts or other events or factors. The Company plans to consummate
securitizations each quarter, but in the event the Company does not close a
securitization in a quarter, the Company's quarterly financial results will be
significantly and adversely affected. In addition, broad market fluctuations,
as well as economic conditions generally, may adversely affect the market
price of the Company's Common Stock. There can be no assurance that the market
price for the Company's Common Stock will not decline below the initial public
offering price. See "Underwriting."

IMMEDIATE AND SUBSTANTIAL DILUTION

Investors participating in this Offering will incur immediate and
substantial dilution of $ per share based on an assumed initial offering
price of $ per share. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. There
can be no assurance that the Company will not require additional funds to
support its capital requirements or for other purposes, in which case the
Company may seek to raise such additional funds through public or private
equity or debt financings or from other sources. There can be no assurance
that such additional financing will be available or that, if available, such
financing will be obtained on terms favorable to the Company and would not
result in further dilution to the Company's stockholders. See "Dilution."

YEAR 2000 ISSUES

There is significant uncertainty regarding the effect of the Year 2000
problem because computer systems that do not properly recognize date sensitive
information when the year changes to 2000 could generate erroneous data or
altogether fail. The Company believes that the computer equipment and software
used by the Company will function properly with respect to dates in the Year
2000 and thereafter. However, third parties that have relationships with the
Company, including its servicer, vendors and borrowers, may experience
significant Year 2000 issues. These issues may have a serious adverse effect
on the operations of such third parties, including a shut-down of operations
for a period of time, which may, in turn, have a material adverse effect on
the Company's business, financial condition and results of operations.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of the Company's Common Stock in the
public market after this Offering could adversely affect the market price of
the Common Stock and could adversely affect the Company's ability to raise
capital. Upon completion of this Offering (based on shares outstanding at
March 31, 1998), the Company will have outstanding shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options. Of these shares, the shares of Common
Stock sold in this Offering will be freely tradeable without restriction or
further registration under the Securities Act, as amended, (the "Securities
Act") unless such shares are purchased by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act. The remaining 23,231,000
shares of Common Stock held by the existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act. As a result

21
<PAGE>

of lock-up agreements and the provisions of Rule 144, Restricted Shares will
be available for sale in the public market as follows: (i) no shares will be
eligible for immediate sale in the public market on the date of this
Prospectus and (ii) 23,231,000 shares will be eligible for sale upon
expiration of lock-up agreements 180 days after the date of this Prospectus,
subject to certain volume and other limitations under Rule 144. In October
1997, stock options to purchase 1,614,987 shares of Common Stock were granted
to certain employees and officers of the Company. The Company intends to file
a registration statement on Form S-8 within 90 days after the Offering to
register all of the shares of Common Stock reserved for issuance under the
1997 Stock Plan. See "Shares Eligible for Future Sale" and "Underwriting."

The Company, the Principal Stockholders and TAG have entered into a
stockholders' agreement pursuant to which the Company has agreed to file one
or more registration statements under the Securities Act in the future for
shares of the Company held by the Principal Stockholders, subject to certain
conditions set forth therein. Pursuant to the stockholders' agreement, the
Company will use its reasonable efforts to cause such registration statements
to be kept continuously effective for the public sale from time to time of the
shares of the Company held by the Principal Stockholders. See "Certain
Transactions."

22
<PAGE>

THE COMPANY

Atherton Capital Incorporated (the "Company") is a leading specialty
commercial finance company engaged in the business of financing seasoned,
multi-unit operators of established national and regional franchise concepts.
The Company was incorporated in Delaware in March 1997 as the successor to the
business of Atherton Capital Partners, L.P. ("ACP").

ACP was established by David L. Elder, the Company's Chief Executive
Officer, and Arthur P. Brazy, Jr., the Company's President, in February 1995
as an operating company to engage in the franchise finance business. Prior to
that time, Mr. Elder had founded The Atherton Group Incorporated ("TAG") in
November 1989 to engage in real estate acquisitions and consulting. In January
1992, Mr. Brazy joined Mr. Elder at TAG.

In February 1995, TAG and Messrs. Elder and Brazy contributed and sold their
rights to receive certain cash flows from securitizations completed by Messrs.
Elder and Brazy on behalf of entities other than the Company to ACP in
connection with ACP's formation. In exchange for such interests, TAG and
Messrs. Elder and Brazy received partnership interests in ACP of 1%, 50% and
34%, respectively. Banco Santander purchased the remaining 15% interest in ACP
at the time of ACP's formation. In January 1996, Koch, through FFC, its
wholly-owned subsidiary, acquired a 5% interest in ACP. In December 1996, FFC
purchased Banco Santander's interest in ACP, increasing its ownership interest
to 20%. In January 1997, FFC acquired an additional 4.5% interest in ACP from
Messrs. Elder and Brazy, further increasing its ownership interest to 24.5%.

In March 1997, ACP contributed its assets and liabilities to the newly-
formed Atherton Capital Incorporated in exchange for stock, which was
distributed to the partners of ACP. At the time of the Company's
incorporation, Koch made an additional cash investment in the Company,
increasing its ownership interest in the Company to approximately 35%.

The Company's principal executive offices are located at 1001 Bayhill Drive,
Suite 155, San Bruno, California 94066 and its telephone number is (650) 827-
7800. The Company originates loans through 12 locations which service six
regions encompassing the entire United States.

23
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of
Common Stock being offered hereby are estimated to be approximately $
million (approximately $ million if the Underwriters' over-allotment
option is exercised in full), at an assumed initial public offering price of
$ per share, after deducting the estimated underwriting discount and
offering expenses. The Company intends to use net proceeds to fund loan
originations and for general corporate purposes. Pending the use of the net
proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment grade obligations and/or reduce
outstanding borrowings under the Warehouse Line and the Facility on an interim
basis. See "Business -- Financing."

DIVIDEND POLICY

The Company does not intend to pay any cash dividends with respect to its
Common Stock in the foreseeable future. The Company intends to retain any
earnings for use in the operation of its business and to fund future growth.
In addition, the payment of dividends is prohibited by the terms of the
Facility. See "Business -- Financing."

24
<PAGE>

CAPITALIZATION

The following table sets forth the borrowings and total capitalization of
the Company at March 31, 1998 and the as adjusted capitalization of the
Company at March 31, 1998, reflecting the sale by the Company of the
shares of Common Stock offered hereby after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company.

<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS EXCEPT
SHARE INFORMATION)
<S> <C> <C>
DEBT:
Warehouse line........................................ $247,620 $
Subordinated debt facility............................ 8,478
-------- ----
Total debt........................................ $256,098
STOCKHOLDERS' EQUITY (1):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding, actual
and as adjusted..................................... $ -- $
Common stock, $0.001 par value; 30,000,000 shares
authorized, 23,231,000 shares issued and
outstanding, actual; 30,000,000 shares authorized,
shares issued and outstanding, as
adjusted............................................ 23
Additional paid-in capital........................... 6,746
Deferred compensation................................ (1,724)
Retained earnings.................................... 2,425
-------- ----
Total stockholders' equity........................ 7,470
-------- ----
Total capitalization............................ $263,568 $
======== ====
</TABLE>
- --------
(1) See Notes 3 and 13 of Notes to Financial Statements.

25
<PAGE>

DILUTION

The net tangible book value of the Company as of March 31, 1998 was $
or $ per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock at that date. After giving effect to the sale by the Company of
the shares of Common Stock offered hereby (after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company), the Company's net tangible book value at March 31, 1998 would have
been $ or $ per share. This represents an immediate increase in net
tangible book value to existing stockholders of $ per share and an
immediate dilution to new investors of $ per share. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Net tangible book value per share as of March 31, 1998........ $
Increase in net tangible book value per share attributable to
new investors................................................
----
Net tangible book value per share after this Offering..........
------
Dilution per share to new investors............................ $
======
</TABLE>

The following table sets forth as of March 31, 1998 the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by existing
stockholders and by the new investors (before deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
-------------- -------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ % $ % $
New investors........................
--- --- ---- ---
Total.............................. 100% 100%
=== === ==== ===
</TABLE>

The foregoing table assumes no exercise of the Underwriters' over-allotment
option. See "Underwriting." The foregoing table also excludes an aggregate of
(i) 2,323,100 shares of Common Stock reserved for issuance pursuant to the
Company's 1997 Stock Plan, of which options to purchase 1,614,987 shares at a
weighted average exercise price of $1.43 were granted to certain employees and
officers of the Company in October 1997, and (ii) shares of Common
Stock reserved for issuance pursuant to the Company's Employee Stock Purchase
Plan. See "Management --1997 Stock Plan," "-- Employee Stock Purchase Plan,"
"Description of Capital Stock" and Notes 3 and 13 of Notes to Financial
Statements.

26
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial and other data should be read in
conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the fiscal
years ended December 31, 1997 and 1996, and for the period from February 10,
1995 (the inception date of Atherton Capital Partners, L.P. ("ACP")) to
December 31, 1995, are derived from the financial statements of the Company
and ACP, the Company's predecessor. Such statements have been audited by KPMG
Peat Marwick LLP, independent auditors, and are included elsewhere in this
Prospectus. The statement of operations data of the Company for the three
months ended March 31, 1998 and 1997 and the balance sheet data as of March
31, 1998 are derived from unaudited financial statements of the Company
included elsewhere in this Prospectus. The operating results for the three
months ended March 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for any other interim period or any other future fiscal
year.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED PERIOD FROM
MARCH 31, DECEMBER 31, INCEPTION TO
---------------------- ------------------- DECEMBER 31,
1998 1997 1997 1996 1995
---------- ---------- ---------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans
(1)................... $ -- $ 6,833 $ 6,833 $ -- $ --
Net interest income.... 768 360 2,192 865 55
Processing fee income
(2)................... 1 8 17 392 --
Loan servicing income.. 43 60 291 179 52
Other income........... 16 1 177 -- 12
---------- ---------- ---------- ------- -------
Total revenues...... 828 7,262 9,510 1,436 119
Expenses:
Salaries and benefits.. 598 242 2,091 875 740
Provision for loan
losses................ 300 -- 200 -- --
General and
administrative........ 655 362 1,994 1,235 805
---------- ---------- ---------- ------- -------
Total expenses...... 1,553 604 4,285 2,110 1,545
---------- ---------- ---------- ------- -------
Income (loss) before
tax and minority
interest.............. (725) 6,658 5,226 (674) (1,427)
Income tax (expense)
benefit................ 265 (2,861) (2,339) -- --
---------- ---------- ---------- ------- -------
Income (loss) before
minority interest..... (460) 3,797 2,885 (674) (1,427)
Minority interest....... -- -- -- (585) --
---------- ---------- ---------- ------- -------
Net income (loss)....... $ (460) $ 3,797 $ 2,885 $(1,259) $(1,427)
========== ========== ========== ======= =======
Net income per share--
basic.................. $ (0.02) $ 0.18 $ 0.13
Net income per share--
diluted................ $ (0.02) $ 0.17 $ 0.12
Weighted average common
shares outstanding--
basic.................. 23,231,000 20,718,000 22,611,356
========== ========== ==========
Weighted average common
shares outstanding--
diluted................ 24,845,987 22,332,987 24,226,343
========== ========== ==========
</TABLE>
- --------
(1) Gain on sale of loans for the three months ended March 31, 1997 and the
year ended December 31, 1997 includes $1.8 million of cash gains received
at the time of sale. Loan origination fees recognized as a component of
the gain on sale of loans generated $1.5 million of cash which was
received at the time the loans were originated.
(2) In 1997, the Company adopted SFAS 125 "Accounting for Transfers of
Servicing and Financial Assets and Extinguishments of Liabilities" which
allowed the Company to recognize a gain on the sale of loans at the time
of securitization (see footnote (1) above). Prior to adoption of SFAS 125,
the Company recognized loan fees collected at the time of origination as
processing fee income.

27
<PAGE>

28
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere herein.

OVERVIEW

The Company is a leading specialty commercial finance company engaged in the
business of financing seasoned, multi-unit operators of established national
and regional franchise concepts. The Company was incorporated in Delaware on
March 10, 1997 as the successor to the business of Atherton Capital Partners,
L.P. ("ACP").

ACP was established by David L. Elder, the Company's Chief Executive
Officer, and Arthur P. Brazy, Jr., the Company's President, in February 1995
as an operating company to engage in the franchise finance business. Prior to
that time, Mr. Elder founded The Atherton Group Incorporated ("TAG") in
November 1989 to engage in real estate acquisitions and consulting. In January
1992, Mr. Brazy joined Mr. Elder at TAG.

In January 1996, Koch, through its wholly-owned subsidiary FFC, acquired a
5% interest in ACP. In December 1996, FFC purchased Banco Santander's interest
in ACP, increasing its ownership interest in ACP to 20%. In January 1997, FFC
acquired an additional 4.5% interest in ACP from Messrs. Elder and Brazy,
increasing its ownership interest to 24.5%.

In March 1997, ACP contributed its assets and liabilities to the newly-
formed Atherton Capital Incorporated in exchange for stock, which was
distributed to the partners of ACP. At the time of the Company's
incorporation, FFC made an additional investment in the Company and further
increased its ownership interest to approximately 35%.

The statement of operations for the period ended March 31, 1997 and for the
year ended December 31, 1997 included herein are the cumulative results of the
Company and ACP. The statement of operations and loan origination data for the
years ended December 31, 1996 and for the period from February 10, 1995
through December 31, 1995 included herein are those of ACP, the Company's
predecessor.

Loan Originations

The Company historically has originated long-term, fixed rate loan products.
In 1997, the Company began offering short-term construction loans and floating
rate loans. The Company originates loans through twelve locations in six
regions encompassing the entire United States. The Company's loans originated
in the year ended December 31, 1997 averaged approximately $667,000 per loan
and approximately $2.1 million per borrower, and had a weighted average
maturity of 13 years. The Company's loans originated during the three-month
period ended March 31, 1998 averaged approximately $641,000 per loan and
approximately $4.0 million per borrower. 65.1% of the aggregate principal
balance of the loans originated during the three-month period ended March 31,
1998 represented loans to two groups of affiliated borrowers. Due in large
part to prepayment penalties and the assumability of its loans, the Company
historically has experienced an annual prepayment rate of less than 1.5%.

Loan originations increased 342.4% to $92.9 million for the three months
ended March 31, 1998 compared to $21.0 million for the three months ended
March 31, 1997, and increased 57.2% to $179.5 million for the year

29
<PAGE>

ended December 31, 1997 as compared to $114.2 million for the year ended
December 31, 1996. During 1997, the Company originated loans to borrowers in
14 franchise concepts compared to eight concepts in 1996, relating to units
located in 28 states compared to 23 states in 1996.

The following table summarizes the Company's loan originations for the three
months ended March 31, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995.

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- --------------------------
1998 1997 1997 1996 1995
--------- --------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan originations:
Original loan balance...... $ 92,881 $20,992 $179,453 $114,171 $9,375
Number of loans............ 145 34 269 173 12
Average loan balance....... $ 641 $ 617 $ 667 $ 660 $ 781
Weighted average interest
rate:
Fixed rate loans........... 8.51% 9.75% 9.93% 9.83% 9.56%
Floating rate loans........ 9.00% 10.38% 9.65% -- % -- %
</TABLE>

Loan Securitizations

The Company currently sells through securitization transactions
substantially all of the loans it originates. In general, the Company's
securitizations involve the sale of a pool of loans on a non-recourse basis to
a special purpose entity ("SPE"). The SPE issues securities evidencing
interests in the loan pool, which are purchased by institutional investors.
Such securities are generally issued in multiple classes that have been
assigned ratings by nationally recognized credit rating agencies reflecting
the relative rights of each of the rated classes to receive payments.
Securitization structures may vary based upon a number of factors, including
without limitation loan portfolio credit quality and characteristics, market
conditions and the availability of credit enhancements such as reserve funds
or bond insurance. Legal and beneficial ownership of the securitized loans is
held by the issuing SPE, and such loans serve as collateral for the securities
issued by the SPE. The assets of the SPE are not available to pay creditors of
the Company. The Company's ongoing interest in such assets is limited to its
retained interests. The following table summarizes the Company's loan
securitizations from inception through March 31, 1998:

<TABLE>
<CAPTION>
ORIGINAL OUTSTANDING
ISSUANCE PRINCIPAL
PRINCIPAL AMOUNT AT CUMULATIVE
ISSUER DATE ISSUED AMOUNT MARCH 31, 1998 LOSSES
- ----------------------- ---------------- --------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Video Franchise Capital
Trust 1996-1 January 24, 1996 $22,415 $16,419 $ --
Atherton Franchise Loan
Funding 1997-A LLC March 14, 1997 $97,276 $92,457 $ --
</TABLE>

See "Business -- Financing -- Securitizations."

Accounting for Gain on Sale of Loans; Retained Interests in Loans Sold

At the close of a securitization, the Company removes from its balance sheet
the loans held for sale and adds to its balance sheet (i) the cash received
and (ii) the estimated fair value of the retained interests in the loans sold
that are held by a non-consolidated subsidiary of the Company. The excess of
the cash received and assets retained over the carrying value of the loans
sold, less transaction costs, equals the net gain on sale of the loans
recorded by the Company. The carrying value of the loans reflects the lower of
cost or market value as determined by indicators of value obtained from
independent third parties or current investor yield requirements. The
Company's cost of a loan reflects the current outstanding principal balance of
the loan net of deferred loan origination fees, certain direct loan costs
deferred at the time of origination and premiums or discounts on purchased
loans.

30
<PAGE>

The Company is not aware of an active market for the purchase or sale of
retained interests in securitized loans. Accordingly, management estimates the
fair value of the retained interests by discounting the expected cash flows to
be received from (i) the excess of the principal balance of the loans pledged
over the principal balance of the securities sold to investors (the
overcollateralization amount) and (ii) the retained servicing rights, using
discount rates commensurate with the risks involved. The Company must also
estimate future rates of prepayments, delinquencies, defaults and default loss
severity as they impact the amount and timing of cash flows. To date, in
discounting anticipated cash flows to be released from the trusts (cash out
method) on its retained interests in securitized loans, the Company generally
(i) has used an effective annual discount rate of 12%, (ii) has assumed an
annual default rate equal to 0.5% of the outstanding principal balance of its
loans, with an assumed 50% recovery rate on defaulted loans 24 months
subsequent to the date of default and (iii) has assumed an annual prepayment
rate of 5% of the then outstanding principal balance of the securitized loans.
See "Risk Factors --Substantial Dependence on Securitizations -- Risks
Associated with Calculation of Gain on Sale."

Retained interests in loans sold generate interest income, net of interest
expense and amortization of premiums and discounts. Interest income is
recognized by the Company to the extent of its ownership interest in the
related earnings or losses of the SPE. The retained interest is carried at
fair value. If prevailing interest rates rise, the Company may need to
increase the required discount rate used in determining the value of retained
interests in securitizations, thus reducing the Company's gain on sale. In
addition, the Company would record an expense, reducing the carrying value (on
a consolidated basis) of retained interests in prior loan securitizations. In
addition, actual rates of credit losses and prepayments are influenced by a
variety of economic and other factors, including general economic conditions
and competition. The Company continues to be subject to risks of
delinquencies, charge-offs and prepayment of the securitized loans to the
extent of the Company's retained interest in the loan securitizations. If
actual credit losses and prepayments exceed the Company's estimates or
historical experience, the Company would be required to record an expense in a
future period or periods, reducing or eliminating the carrying value of
retained interests in loan securitizations.

Although the Company sells the underlying loans to a SPE in its
securitizations, it will often retain a subordinated class of securities
issued by the SPE or an interest in one of the forms of credit enhancement
supporting the more senior classes, such as a reserve account or the residual
interest. The Company (on a consolidated basis), therefore, continues to be
subject to risks of delinquencies, prepayments and charge-offs of the
securitized loans to the extent the Company holds any subordinated classes of
securities, provides reserve funds or retains an interest in the credit
enhancements. See "Risk Factors -- Loan Underwriting and Credit Quality
Risks."

31
<PAGE>

RESULTS OF OPERATIONS

Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997

The following discussion compares the Company's results of operations for
the three months ended March 31, 1998 to those for the three months ended
March 31, 1997. Results of operations for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the year
ended December 31, 1998, or any interim period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gain on sale of loans................. $ -- $ 6,833
Interest income....................... 4,609 1,906
Interest expense...................... (3,841) (1,546)
------- --------
Net interest income................ 768 360
Loan servicing income.................. 43 60
Processing fee income.................. 1 8
Other income........................... 16 1
------- --------
Total revenues......................... 828 7,262
------- --------
Expenses:
Salary and benefits................... 598 242
Professional services................. 182 89
Travel and business promotion......... 93 74
Marketing............................. 114 39
Premises and equipment................ 149 99
Provision for loan losses............. 300 --
Amortization.......................... 16 15
General and administrative............ 101 46
------- --------
Total expenses......................... 1,553 604
------- --------
Net income (loss) before taxes......... (725) 6,658
Income tax (expense) benefit........... 265 (2,861)
------- --------
Net income (loss)...................... $ (460) $ 3,797
======= ========
</TABLE>

Total revenues decreased 88.6% to $828,000 for the three months ended March
31, 1998, from $7.3 million for the comparable period in 1997. During the same
periods, the Company's total expenses increased 157.1% to $1.6 million from
$604,000. As a result, the Company's net income decreased 112.1% to a net loss
of $460,000 for the three months ended March 31, 1998, as compared to net
income of $3.8 million for the comparable period in 1997.

The decrease in revenues was primarily attributable to a $6.8 million
decrease in gain on sale of loans. During the three months ended March 31,
1998, no loans were securitized, as compared to $97.3 million of loans sold in
a securitization, for a gain on sale of $6.8 million (of which $1.8 million
was cash), during the three months ended March 31, 1997. For a discussion of
how gain on sale is calculated by the Company, see "-- Overview -- Accounting
for Gain on Sale of Loans; Retained Interests in Loans Sold."

Net interest income increased 113.3% to $768,000 for the three months ended
March 31, 1998, as compared to $360,000 for the same period in 1997. The
increase was due primarily to an increase in loans held for sale from $23.5
million at March 31, 1997 to $259.1 million at March 31, 1998, resulting from
increased loan originations of 342.4% or $71.9 million during the three months
ended March 31, 1998 as compared to the three months ended March 31, 1997.

32
<PAGE>

The increase in expense of $949,000 for the three months ended March 31,
1998 was due primarily to infrastructure additions, including salary and
benefit increases, to support increased loan originations. Salaries and
benefits expense increased $356,000, or 147.1%, reflecting the addition of 26
employees during the 12-month period ended March 31, 1998 and amortization of
$123,000 of deferred compensation expense relating to options granted by the
Company in October 1997. Professional services increased 104.5% to $182,000
for the three months ended March 31, 1998 as compared to $89,000 for the three
months ended March 31, 1997. In addition, the allowance for loan losses, which
was first established in the amount of $200,000 during 1997 with respect to
loans made to a particular borrower, was increased to $500,000 at March 31,
1998 to reflect the borrower's filing of a bankruptcy petition affecting one
of the three stores collaterizing the transaction. Subsequently, the borrower
defaulted on two of its three loans.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gain on sale of loans.................. $ 6,833 $ --
Interest income........................ 8,808 3,925
Interest expense....................... (6,616) (3,060)
------- -------
Net interest income................. 2,192 865
Loan servicing income................... 291 179
Processing fee income................... 17 392
Other income............................ 177 --
------- -------
Total revenues.......................... 9,510 1,436
------- -------
Expenses:
Salaries and benefits.................. 2,091 875
Professional services.................. 514 299
Travel and business promotion.......... 320 196
Marketing.............................. 179 213
Premises and equipment................. 472 289
Provision for loan losses.............. 200 --
Amortization........................... 62 50
General and administrative............. 447 188
------- -------
Total expenses.......................... 4,285 2,110
------- -------
Net income (loss) before taxes and mi-
nority interest........................ 5,225 (674)
Income tax expense...................... (2,339) --
------- -------
Income (loss) before minority interest.. 2,886 (674)
Minority interest....................... -- (585)
------- -------
Net income (loss)....................... $ 2,886 $(1,259)
======= =======
</TABLE>

Total revenues increased 562.3% to $9.5 million for the year ended December
31, 1997 from $1.4 million for the year ended December 31, 1996. For the same
years, the Company's total expenses increased 103.1% to $4.3 million from $2.1
million. As a result, the Company's net income increased to $2.9 million for
the year ended December 31, 1997, as compared to a net loss of $1.3 million
for 1996.

The $8.1 million increase in revenues for the year ended December 31, 1997
was attributable primarily to the sale of approximately $97.3 million of loans
in a securitization in 1997, resulting in a $6.8 million gain on sale of loans
(of which $1.8 million was cash).

33
<PAGE>

Net interest income also contributed to the increase in revenues, increasing
153.4% to $2.2 million for the year ended December 31, 1997, as compared to
$865,000 for the year ended December 31, 1996. The increase in net interest
income was due primarily to a 70.0% increase in loans held for sale of $69.1
million, resulting from a 57.2% increase in loan originations to $179.5
million in 1997 as compared to $114.2 million in 1996.

The 103.1% increase in total expenses to $4.3 million for the year ended
December 31, 1997 compared to $2.1 million for the year ended December 31,
1996 resulted primarily from the growth in operations of the Company due to
the increase in loan originations. Salaries and benefits expense increased
$1.2 million, or 139.0%, reflecting the addition of 26 employees during the
12-month period ended March 31, 1998 and amortization of $123,000 of deferred
compensation expense relating to options granted by the Company in October
1997, general and administrative expenses increased $259,000, or 137.8%, and
provision for loan losses increased $200,000 for the year ended December 31,
1997 as compared to the year ended December 31,1996.

Year Ended December 31, 1996 Compared to the Period from Inception to
December 31, 1995

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED INCEPTION TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Gain on sale of loans.................. $ -- $ --
Interest income........................ 3,925 111
Interest expense....................... (3,060) (56)
------- -------
Net interest income.................... 865 55
Loan servicing income................... 179 52
Processing fee income................... 392 --
Other income............................ -- 12
------- -------
Total revenues.......................... 1,436 119
------- -------
Expenses:
Salaries and benefits.................. 875 740
Professional services.................. 299 454
Travel and business promotion.......... 196 109
Marketing.............................. 213 39
Premises and equipment................. 289 108
Provision for loan losses.............. -- --
Amortization........................... 50 4
General and administrative............. 188 92
------- -------
Total expenses.......................... 2,110 1,546
------- -------
Net income (loss) before taxes and mi-
nority interest........................ (674) (1,427)
Income tax expense...................... -- --
------- -------
Income (loss) before minority interest.. (674) (1,427)
Minority interest....................... (585) --
------- -------
Net income (loss)....................... $(1,259) $(1,427)
======= =======
</TABLE>

Total revenues increased from $119,000 in 1995 to $1.4 million for the year
ended December 31, 1996. In 1996, the Company's total expenses increased 36.6%
to $2.1 million from $1.5 million. As a result, the Company's net loss
decreased by $168,000 to $1.3 million.

The increase in total revenues of $1.3 million from 1995 to 1996 was largely
a result of a $811,000 increase in net interest income. The increase in net
interest income was due primarily to the increase in loans held for sale
resulting from an increase in loan originations to $114.2 million in 1996 as
compared to $9.4 million in 1995. The increase in loan originations was
attributable in part to the Company's ability to finance loans directly during
1996 through the Warehouse Line.

34
<PAGE>

In 1996, the Company recognized $392,000 in processing fee income in
connection with the securitization of $22.4 million in loans. In 1997, the
Company adopted SFAS 125 "Accounting for Transfers of Servicing and Financial
Assets and Extinguishments of Liabilities" which allowed the Company to
recognize a gain on the sale of loans at the time of securitization. Prior to
adoption of SFAS 125, the Company recognized loan fees collected at the time
of origination as processing fee income.

Loan servicing advisor fee income increased 244.2% to $179,000 for the year
ended December 31, 1996 as compared to $52,000 in 1995.

The 36.6% increase in total expenses to $2.1 million for the year ended
December 31, 1996, compared to $1.5 million for the year ended December 31,
1995 resulted primarily from increases in marketing expenses of 446.2% to
$213,000 for the year ended December 31, 1996 compared to $39,000 for 1995. In
addition, premises and equipment expenses increased 167.6% to $289,000 for the
year ended December 31, 1996 compared to $109,000 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires access to short-term warehouse and other lines of
credit in order to fund loan originations pending sale or securitization. At
March 31, 1998, the Company had the following lines of credit:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INDEX AND INTEREST RATE
MARGIN AS OF COMMITMENT PRINCIPAL
LENDER EXPIRATION DATE RANGE MARCH 31, 1998 AMOUNT OUTSTANDING
- --------------------- ----------------- --------- -------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FFC Warehouse Line of
Credit December 31, 1999 LIBOR+ 7.79% $300,000 $247,620
2.0-3.5%
FFC Subordinated Debt December 31, 1999 LIBOR+ 13.25% $ 20,000 $ 8,478
7.5%
</TABLE>

See "Business -- Financing -- Lines of Credit."

The Company is currently negotiating for additional credit facilities with
third-party lenders in order to finance its expanding loan origination
activities. There can be no assurance, however, that the Company will be able
to obtain any such new facilities.

The Company's sources of operating cash flow include (i) loan origination
income and fees, (ii) net interest income on loans held for sale, (iii)
servicing advisor fees and (iv) cash proceeds from loan securitizations. Cash
from loan origination fees, net interest income on loans held for sale and
servicing advisor fees, as well as available borrowings, provide adequate
liquidity to fund current operating expenses and loan origination needs. See
"Business -- Financing -- Securitizations."

For the three months ended March 31, 1998, net cash used by operating
activities was $4.4 million. This includes cash used in loan originations of
$5.8 million, which was attributable to the Company's increased loan
origination volume. For the year ended December 31, 1997, net cash used by
operating activities was $3.6 million, including cash used by loan origination
activity of $107.5 million.

For the three months ended March 31, 1998, net cash provided by financing
activities was $4.3 million, which was attributable to increased amounts of
Facility borrowings resulting from increased loan originations during the
period. For the year ended December 31, 1997, net cash provided by financing
activities was
$2.9 million, which was attributable primarily to a capital contribution
resulting from the issuance of additional shares of Common Stock to an
existing stockholder.

35
<PAGE>

INFLATION AND INTEREST RATE FLUCTUATIONS

The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which requires the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased costs
of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company's operations are monetary in nature.

A substantial and sustained increase in interest rates, whether due to
inflation or otherwise, could adversely affect the Company's ability to
originate loans. The Company's profitability may be directly affected by
fluctuations in interest rates which affect the Company's ability to earn a
spread between interest received on its loans held for sale and rates of
interest paid by the Company on the Warehouse Line, the Facility and/or other
lines of credit. If prevailing interest rates rise, the Company may need to
increase the required discount rate used in determining the value of its
retained interests in securitizations, thus reducing the Company's gain on
sale. In addition, the Company may be required to record an expense, reducing
the carrying value (on a consolidated basis) of retained interests in prior
loan securitizations.

TAX CONSIDERATIONS

Prior to its incorporation on March 10, 1997, the Company's predecessor
qualified to be taxed as a partnership. As such, the Company's predecessor was
not responsible for federal or state income taxes. Accordingly, income and
loss was allocated to the partners and taxed directly to the partners for
federal income and state franchise tax purposes. As a result of the change in
tax status effective with the incorporation of the Company, the Company is
required to provide for all income taxes at statutory rates. These factors are
estimated to result in an effective tax rate for periods subsequent to the
date of incorporation of approximately 44.8%. See Notes 3 and 14 of Notes to
Financial Statements.

ACCOUNTING CONSIDERATIONS

In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS 130 on January 1,
1998. The adoption of SFAS 130 had no impact on the Company's financial
position, results of operations or disclosures.

In June 1997, FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. Management is in the process of
identifying its operating segments and intends to make the required
disclosures for operating segments in its 1998 annual financial statements.
SFAS 131 will result in disclosure changes only.

In February 1998, FASB issued SFAS No. 132, "Employers Disclosures about
Pension and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No.88, "Employers Benefits," and SFAS No. 106, "Employers' Accounting for
Retirement Benefits Other than Pensions." SFAS 132 standardizes the disclosure
requirements of SFAS Nos. 87 and 106 to the extent practicable and recommends
a parallel format for presenting information about pensions and other
retirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. SFAS 132 will result in disclosure changes only.

36
<PAGE>

YEAR 2000 ISSUES

The Company has assessed its internal systems, programs and data processing
applications as well as those provided to the Company by third-party vendors
with respect to Year 2000 data processing issues. A significant portion of the
Company's loan servicing is performed by a third-party servicer from which the
Company has received oral confirmation that it expects to be compliant with
Year 2000 issues on a timely basis. However, there can be no assurance that
such third party servicer's efforts will be successful. In addition, other
third parties that have relationships with the Company, including borrowers,
may experience significant Year 2000 issues. The Company has not incurred
significant expense to date, and does not anticipate incurring significant
future expense, to address Year 2000 issues although there can be no assurance
that the Company will not incur significant future expenses.

37
<PAGE>

FRANCHISING INDUSTRY OVERVIEW

OVERVIEW

The Company is a leading specialty commercial finance company engaged in the
business of financing seasoned, multi-unit operators of established national
and regional franchise concepts.

A franchise is a business operating pursuant to a franchise agreement under
which the franchisee undertakes to conduct a business or sell a product or
service in accordance with methods and procedures prescribed by a franchisor,
and the franchisor undertakes to assist the franchisee through advertising,
promotion and other advisory services. Franchises encompass a wide range of
retail industries, including restaurants, retail gas, automotive services and
other specialty retail. In 1997, franchised businesses operated one out of
every 12 business establishments in the U.S. and generated approximately 40%
of all retail sales, or approximately $800 billion, according to the
International Franchise Association ("IFA"). According to the IFA, there are
more than 550,000 franchises in the United States employing more than 8
million persons.

Restaurants

The food services industry was estimated by the National Restaurant
Association to have had total revenues of approximately $320 billion in 1997,
two thirds of which were attributable to restaurant sales. The restaurant
business can generally be divided into two markets: quick service restaurants
("QSRs") and full service restaurants (which include family and casual dining
concepts). QSRs, including such concepts as Burger King and Taco Bell, have
demonstrated average sales growth from 1985 through 1996 of approximately 7%
per year, according to Fitch IBCA, Inc. Full service concepts, which through
high-end casual dining concepts cater to the maturing demographics of the U.S.
population, have experienced consistent average sales growth in excess of 4%
per year over the past four years according to the Restaurant Industry
Operations Report. According to Nation's Restaurant News, as of June 1997, the
top 100 restaurant franchise concepts total approximately 136,000 units, of
which more than 85,000 were franchised.

The Company believes that expansion and consolidation of the franchise
industry is likely to result from store acquisitions, expansion into alternate
delivery mechanisms (such as kiosks and co-branded stores) and international
operations. Moreover, certain franchisors, such as Taco Bell, Pizza Hut and
KFC, have recently begun to sell previously franchised units currently owned
by the franchisor (i.e., refranchising) in an effort to reduce their fixed
assets and focus on their core competencies. The Company believes that these
consolidation trends are likely to result in an increasing number of stronger,
larger multi-unit franchise operators with seasoned management teams, stronger
credit profiles and increased needs for acquisition and other types of
financing.

Retail Gas Outlets

The retail gas outlet ("RGO") market shares many of the same operating
characteristics as the restaurant industry, including large numbers of
franchise units, significant funding requirements, strong unit level cash
flow, standardized operations and a lack of competitive long-term funding
sources. According to National Petroleum News, there were approximately
185,000 retail locations selling motor fuel in 1997, including gasoline/
convenience stores, traditional service stations and truck stops. In addition,
many retail gas outlets are reconfiguring their operations to include
alternative profit centers through co-branding with convenience stores, car
washes, QSRs and car care centers, intensifying the need for additional
capital.

Specialty Retail

Other franchised industries include various specialty retail industries and
concepts, such as truck stops/auto plazas, automotive service providers and
video rental stores. The increasing technical complexity of automotive repair
and current demands on consumers' time has led to growth in demand for
automotive repair specialists. In response, franchisors such as Midas and
Jiffy Lube and various other automotive service concepts have begun to expand
their product offerings and have been constructing new stores and expanding
existing units. According

38
<PAGE>

to the Automotive Parts and Accessories Association, the retail automotive
services segment had over $151 billion in annual sales in 1997.

TRADITIONAL FRANCHISE FINANCE

Historically, financing alternatives available to franchisees have been
limited. Prior to the advent of specialty franchise finance lenders,
franchisees had three alternatives to raise debt capital, each of which, when
available, imposed significant restrictions on borrowers, including relatively
high interest rates, limited loan proceeds, restrictions on use of proceeds,
personal guarantees and other constraining terms and provisions.

Traditional Asset-Based Lending

Banks, leasing companies and finance companies have traditionally been the
largest lenders to franchisees. These lenders historically have limited their
franchise lending exposure due to their perception that franchisees present
the same credit risks and potential for default as other small business
ventures. As a result, these lenders generally have offered loan products on a
short-term, floating rate basis, have required personal guarantees and have
charged relatively high rates of interest. Furthermore, asset-based lenders
traditionally have restricted the amount they will advance to a percentage of
the liquidation value of the collateral pledged against the loan, with little
or no recognition being given to the enterprise value of the business, its
cash flow capacity, store seasoning, brand affiliation or management
experience. Many of these lenders have also concentrated on a small percentage
of the most established national franchise concepts.

SBA Loan Programs

Guaranteed loans from the U.S. Small Business Administration ("SBA")
typically have served as an alternative for small businesses that are unable
to obtain funds from traditional lending sources. However, SBA programs
generally offer only limited advances to borrowers, impose significant
covenants and guarantee loans only in limited principal amounts. Furthermore,
SBA loans restrict use of loan proceeds, have burdensome documentation
requirements and require a time consuming approval process.

Direct Financing from the Franchisor

Many franchisors offer franchisees some assistance in obtaining financing
for their capital needs. However, such assistance often consists only of
advice or the recommendation of a preferred lender. Actual financial
assistance typically has been restricted to new store development and has been
limited in amount. This financing alternative recently has become even more
limited as franchisors focus more on their core competencies and less on
capital intensive activities such as operating units and financing
franchisees.

SPECIALTY FRANCHISE FINANCE

In the early 1990s, a new generation of franchise lenders emerged,
consisting of a small number of specialty commercial finance companies
dedicated to financing franchisees in a more efficient and cost effective
manner than traditional bank and finance company lending sources. Those
franchise operators that were part of a large, successful and broadly diverse,
national franchise concept generally exhibited lower default rates than other
small businesses, and were more likely to succeed earlier in their operating
histories than non-franchised small businesses. Minimum operating and
performance standards set by the franchisor, combined with the franchisor's
overall support of the franchise system, often enhanced a franchise operator's
potential to succeed and service debt. Franchisors also often provide support
in site selection, operator training, marketing, advertising, project pricing
and financial feasibility analyses. In addition, a franchisor has a vested
interest in maintaining the viability of its franchise system through material
financial support, as store failures would negatively impact the markets'
perception of the brand value of the franchise system as a whole and interrupt
the franchisor's royalty income payments.

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<PAGE>

FRANCHISE FINANCE OPPORTUNITY

The Company believes that existing sources for financing continue to fail to
meet all of the needs of franchisee borrowers. The Company believes that
industries and concepts with large funding requirements, proven ability to
generate cash flow, standardized operations, limited long-term funding sources
and other characteristics appropriate for a structured finance product include
restaurants, RGOs, automotive services, video rental stores and other
specialty retail concepts. The Company believes that there will be increasing
demand for franchise loan products as a result of expected strong growth rates
in franchised industries and certain trends in the franchise industry
including store acquisition and enhancement, refranchising and continued
consolidation among franchisees. There can be no assurance, however, that such
increased demand will materialize.

40
<PAGE>

BUSINESS

OVERVIEW

The Company is a leading specialty commercial finance company engaged in the
business of financing seasoned, multi-unit operators of established national
and regional franchise concepts. The Company initially focused on providing
financing to franchisees of quick service restaurant ("QSR") concepts, such as
Burger King, Wendy's and Taco Bell. The Company has expanded its business to
encompass other franchise industries, including casual and family dining
concepts, such as Denny's and TGI Friday's; specialty retail concepts, such as
Midas, Blockbuster and Jiffy Lube; and retail energy concepts, such as Amoco
and Citgo. The Company offers diverse and flexible loan products designed to
meet the varied financing needs of franchise operators, including store
refinancings, acquisitions of existing units, new store construction, real
estate acquisitions, store improvements and equipment purchases. The Company
underwrites franchise loans primarily on the basis of sustainable cash flow
and enterprise value (the price an independent prospective buyer would pay for
the operating business) rather than on the more traditional basis of the value
of real estate and personal property collateral.

The Company originates fixed and floating interest rate loan products
through 12 locations which service six regions encompassing the entire the
United States. The Company's loans have been funded primarily through the
Warehouse Line and the Facility provided by Koch through its wholly-owned
subsidiary, FFC. From the Company's inception through March 31, 1998, the
Company has funded more than $395.8 million in loans with an average loan size
of approximately $661,000. Annual loan originations grew to $179.5 million in
1997, up from $114.2 million in 1996. Loan growth continued during the first
quarter of 1998, with total originations of $92.9 million, compared to $21.0
million during the first quarter of 1997. At March 31, 1998, the Company had
four loans to two borrowers amounting to $2.3 million, or less than 1% of all
loans in the Company's servicing portfolio, more than 30 days delinquent and
had no loans more than 60 days delinquent. One of the Company's borrowers has
declared bankruptcy with respect to one franchise property pledged as
collateral for a loan extended by the Company in the amount of $267,000. From
its inception through March 31, 1998, the Company has experienced no charge-
offs.

The Company sells loans primarily to institutional investors through
securitization transactions. To date, the Company has securitized 30.9% of all
loans originated and, beginning in the second quarter of 1998, intends to
effect securitization transactions on a quarterly basis. There can be no
assurance, however, that the Company will be able to complete securitizations
quarterly, or at all. As of March 31, 1998, the Company held $259.1 million of
loans, including construction loans. The Company also acts as the servicing
advisor for its securitized loans and receives a servicing advisor fee for
such services. The Company's founders, David L. Elder and Arthur P. Brazy,
Jr., have worked together since 1992 developing securitizable loan products
for franchisees.

BUSINESS STRATEGY

Increase Lending to Existing Markets

The Company intends to continue to leverage its brand name, reputation for
competitive prices and quality service in order to expand its market share in
the restaurant and specialty retail franchise lending segments. The

41
<PAGE>

Company believes that recent growth in the restaurant and specialty retail
segments, along with continued trends of refranchising of units currently
owned by franchisors and consolidation among franchisees will create
additional financing opportunities for the Company. The Company makes use of
its proprietary databases of franchise industry contacts to increase its
penetration of existing markets.

Expand into New Franchise Markets

The Company has identified as potential expansion opportunities several
franchise market segments which exhibit characteristics similar to those of
its existing client base, including large numbers of franchise units,
significant funding requirements, strong unit level cash flows, standardized
operations and a lack of alternate competitive funding sources. The Company
believes it is well-positioned to offer its franchise finance products to
other largely underserved segments of various franchise industries.

Develop Additional and Improve Existing Financial Products

The Company has introduced several new loan products to various concepts and
franchisees, and it intends to continue its development of new, more flexible
financial products and lending programs that are specifically tailored to meet
the needs of franchisees in a variety of franchise systems. In addition, the
Company continuously analyzes and seeks to enhance its existing products. For
example, the Company recently began offering a zero fee, zero point loan and
intends to market more aggressively its floating rate product. The Company has
also begun offering construction loans to experienced multi-unit operators for
new store development. The Company's construction loans are designed to
convert automatically into its standard long-term, permanent loan product upon
the fulfillment of certain conditions, thereby allowing the Company to capture
a franchisee's permanent financing business at a project's outset. The Company
may also offer other products to meet the evolving needs of franchisees,
including mezzanine debt and equity capital.

Diversify Revenue Sources

The Company intends to explore other strategies for revenue growth and
diversification, including the acquisition of existing loan portfolios, the
offering of advisory services within the franchise industry and the
development of lease, vendor and distributor financing programs.

Provide Superior Customer Service

The Company believes that a key to its success has been its responsiveness
to customer needs, which is directly attributable to the quality of its
personnel and its focus on serving the needs of its customer base. The
Company's management, as well as its sales, marketing and underwriting
executives, has spent many years developing expertise in the franchise finance
market and are therefore able to add substantial value in formulating the
products the Company offers to its borrowers. The Company believes its
experience translates into more efficiently structured transactions and thus
into savings in cost and time for its borrowers. In addition, to enhance
customer service, the Company has made investments in loan origination
infrastructure as well as high quality underwriting, closing, documentation
and servicing personnel, while outsourcing administrative functions in order
to focus on its core competencies.

Maintain High Credit Standards

Management emphasizes high credit quality standards in order to achieve
strong loan portfolio performance. The Company believes its proprietary
underwriting model and industry expertise enable it to identify the most
creditworthy potential borrowers. The Company's expertise in analyzing
industries, concepts, borrowers and transactions will be important as it
enters new markets and introduces new products.

Improve Borrowing Spread and Diversify Funding Sources

The Company continually seeks to reduce its funding costs and diversify its
warehouse funding sources. The Company seeks to lengthen the maturities of its
committed secured credit facilities and increase the number

42
<PAGE>

of providers. Currently, the Company is negotiating to obtain additional,
lower cost warehouse facilities providing greater lending flexibility. There
can be no assurance, however, that the Company will succeed in obtaining such
credit facilities on favorable terms, or at all. Reduction in the Company's
funding costs would enable the Company to remain rate competitive. Moreover,
the development of additional lender relationships provides the Company with
greater resources and flexibility to address possible future market
conditions.

Improve Secondary Market Execution

The Company is committed to maintaining effective secondary market execution
on loans that it originates and sells. The Company's securitizations have
enabled it to reduce its exposure to the risks associated with holding loans
on its balance sheet. The Company believes that the favorable execution it has
experienced to date is primarily the result of the attractive terms and the
credit quality of the loans that it originates. In addition, the Company acts
as the servicing advisor for the loans it has securitized, providing a liaison
between the secondary market and its customers.

LOAN PRODUCTS

The Company provides a number of loan products, including both fixed and
floating rate permanent loans and floating rate construction loans, to meet
the financing needs of franchisees.

Permanent Loans. The Company traditionally offered long-term, fixed and
floating rate, fully-funded, non-recourse financing to franchisees operating
in established national and regional franchise concepts. Financing provided by
the Company has been used for the refinancing of existing units, store
acquisitions, store development and improvement, and real estate and equipment
acquisitions. The Company's permanent loans are generally fully amortizing.
Fixed rate loans bear interest at a U.S. Treasury rate plus a spread, while
floating rate loans bear interest at LIBOR plus a spread and interest is
generally recalculated on a monthly basis. All franchise loans currently
originated by the Company are assumable (subject to certain limitations) and
include prepayment penalties.

Construction Loans. The Company recently began providing short-term,
floating rate construction loans to experienced multi-unit franchise operators
developing additional stores. These loans, during the construction phase,
require only interest payments and generally provide for draws based on
milestones set forth in the loan documents. The Company's construction loans
offer certain benefits generally not available from other traditional
financing sources. First, the Company will finance 100% of a development
project's actual construction costs, realizing that "as completed" enterprise
value will be created by the construction and development process well in
excess of the costs of construction. Second, the Company will release personal
guarantees required during construction as the sales and coverage ratios of
the completed, operating unit meet certain underwriting parameters set by the
Company (QSRs typically require less than six months to complete and 12 months
to stabilize operations). Third, concurrently with the approval of a
construction loan, the Company provides a qualified commitment for permanent
long-term financing. Finally, the Company's construction loans allow a
borrower to request an enterprise valuation for its store after an 18 to 24
month seasoning period in order to draw cash proceeds based on the additional
business value the operator has created. Management expects construction loans
to comprise a growing proportion of new originations by the end of 1998. If
construction is not completed within a specified time period, the loan becomes
due and payable.

LOAN ORIGINATION HISTORY

Since 1995, the Company has originated more than $395 million of franchise
loans, substantially all of which were originated subsequent to January 1,
1996. The Company's loan originations during the first quarter of 1998 totaled
$92.9 million. The Company has originated loans on a nationwide basis to
borrowers operating in 19 franchise concepts in 35 states. In addition, the
Company's management has approved more than 30 additional franchise concepts
for loan originations.

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<PAGE>

The following table sets forth the Company's loan originations by franchise
segment for the periods indicated.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------- ----------------------------------------
WEIGHTED AGGREGATE WEIGHTED AGGREGATE
NUMBER AVERAGE ORIGINAL % OF NUMBER AVERAGE ORIGINAL % OF
OF LOANS INTEREST LOAN TOTAL OF LOANS INTEREST LOAN TOTAL
ORIGINATED RATE BALANCE ORIGINATED ORIGINATED RATE BALANCE ORIGINATED
---------- -------- --------- ---------- ---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant Loans:
Fixed Rate
Loans........... 78 8.49% $59,113 63.6% 33 10.41% $20,042 95.5%
Floating Rate
Loans (1)....... 7 9.00% 3,866 4.2% 1 9.75% 950 4.5%
--- ----- ------- ------ --- ------ ------- ------
Total
Restaurant...... 85 8.52% 62,979 67.8% 34 10.38% 20,992 100%
Specialty Retail:
Fixed Rate
Loans........... 60 8.56% 29,902 32.2% -- -- -- --
Floating Rate
Loans (1)....... -- -- -- -- -- -- -- --
--- ----- ------- ------ --- ------ ------- ------
Total Specialty
Retail.......... 60 8.56% 29,902 32.2% -- -- -- --
--- ----- ------- ------ --- ------ ------- ------
Total Loan
Originations..... 145 8.53% $92,881 100.0% 34 10.38% $20,992 100.0%
=== ===== ======= ====== === ====== ======= ======
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
---------------------------------------- ----------------------------------------
WEIGHTED AGGREGATE WEIGHTED AGGREGATE
NUMBER AVERAGE ORIGINAL % OF NUMBER AVERAGE ORIGINAL % OF
OF LOANS INTEREST LOAN TOTAL OF LOANS INTEREST LOAN TOTAL
ORIGINATED RATE BALANCE ORIGINATED ORIGINATED RATE BALANCE ORIGINATED
---------- -------- --------- ---------- ---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant Loans:
Fixed Rate
Loans........... 261 9.93% $171,194 95.4% 140 9.97% $ 91,756 80.4%
Floating Rate
Loans (1)....... 8 9.65% 8,259 4.6% -- -- -- --
---------- -------- --------- ---------- ---------- -------- --------- ----------
Total
Restaurant...... 269 9.92% 179,453 100.0% 140 9.97% 91,756 80.4%
Specialty Retail:
Fixed Rate
Loans........... -- -- -- -- 33 9.30% 22,415 19.6%
Floating Rate
Loans (1)....... -- -- -- -- -- -- -- --
---------- -------- --------- ---------- ---------- -------- --------- ----------
Total Specialty
Retail.......... -- -- -- -- 33 9.30% 22,415 19.6%
---------- -------- --------- ---------- ---------- -------- --------- ----------
Total Loan
Originations..... 269 9.92% $179,453 100.0% 173 9.83% $114,171 100.0%
========== ======== ========= ========== ========== ======== ========= ==========
</TABLE>
- -----
(1) Includes all construction loans originated by the Company, which generally
carry higher interest rates than the Company's permanent loans.

44
<PAGE>

Geographic Distribution. The following table sets forth by state certain
information regarding loans originated by the Company for the periods
indicated.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
---------------------------------------- ------------------------------- -------------------------------
AGGREGATE AGGREGATE AGGREGATE
NUMBER OF ORIGINAL NUMBER OF ORIGINAL NUMBER OF ORIGINAL
LOANS LOAN % OF TOTAL LOANS LOAN % OF TOTAL LOANS LOAN % OF TOTAL
ORIGINATED BALANCE ORIGINATED ORIGINATED BALANCE ORIGINATED ORIGINATED BALANCE ORIGINATED
----------- ------------- ----------- ---------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama.............. 1 $ 950 1.0% 2 $ 1,450 0.8% 12 $ 6,315 5.5%
Alaska............... -- -- -- -- -- -- 2 426 0.4
Arizona.............. 2 1,548 1.7 3 1,817 1.0 -- -- --
Arkansas............. 1 775 0.8 5 1,000 0.6 2 1,441 1.3
California........... 4 3,045 3.3 32 19,026 10.6 27 16,889 14.8
Colorado............. -- -- -- 7 4,893 2.7 -- -- --
Connecticut.......... -- -- -- 2 2,300 1.3 2 2,340 2.0
Florida.............. -- -- -- 36 32,245 18.0 12 7,225 6.3
Georgia.............. 3 1,590 1.7 13 9,594 5.3 10 6,255 5.5
Illinois............. -- -- -- 5 4,050 2.3 18 12,550 11.0
Indiana.............. 5 4,910 5.3 -- -- -- -- -- --
Iowa................. 1 390 0.4 -- -- -- -- -- --
Kansas............... 11 7,354 7.9 1 575 0.3 4 2,123 1.9
Louisiana............ -- -- -- 3 750 0.4 2 1,478 1.3
Maryland............. -- -- -- 4 3,525 2.0 4 1,647 1.4
Massachusetts........ -- -- -- 13 10,628 5.9 7 7,340 6.4
Michigan............. 19 16,435 17.7 35 21,278 11.9 9 7,240 6.3
Minnesota............ 23 11,191 12.0 1 700 0.4 -- -- --
Mississippi.......... -- -- -- 3 4,000 2.2 -- -- --
Missouri............. 26 9,360 10.1 1 755 0.4 2 1,600 1.4
Nebraska............. 6 2,955 3.2 -- -- -- -- -- --
Nevada............... -- -- -- 1 750 0.4 -- -- --
New Hampshire........ -- -- -- 2 2,050 1.1 -- -- --
New Jersey........... -- -- -- 11 7,176 4.0 3 2,070 1.8
New York............. 1 965 1.0 10 7,320 4.1 13 9,270 8.1
Ohio................. -- -- -- 3 1,683 0.9 2 775 0.7
Oklahoma............. -- -- -- -- -- -- 1 1,450 1.3
Oregon............... 3 1,967 2.1 -- -- -- -- -- --
Pennsylvania......... -- -- -- 22 11,467 6.4 5 3,275 2.9
South Carolina....... 6 2,510 2.8 -- -- -- 15 7,480 6.6
Tennessee............ -- -- -- 3 1,831 1.0 6 4,048 3.5
Texas................ 12 9,631 10.4 35 16,088 9.0 14 10,339 9.1
Virginia............. -- -- -- 4 2,852 1.6 -- -- --
Washington........... -- -- -- 5 4,665 2.6 1 595 0.5
Wisconsin............ 21 17,305 18.6 7 4,983 2.8 -- -- --
--------- ------------- ----------- --- -------- ----- --- -------- -----
145 $ 92,881 100.0% 269 $179,453 100.0% 173 $114,171 100.0%
========= ============= =========== === ======== ===== === ======== =====
</TABLE>

45
<PAGE>

SALES AND MARKETING

The Company conducts its national sales and marketing activities through 12
locations which service six regions encompassing the entire United States. The
Company employs dedicated marketing executives who are responsible for
developing relationships with prospective borrowers and originating loans. The
Company actively recruits experienced lending officers to increase its
marketing capabilities. In leveraging its sales force, the Company utilizes a
variety of strategies designed to reach the greatest number of potential
borrowers, including (i) participation at franchise seminars, trade shows,
conventions and conferences, (ii) utilization of the Company's proprietary
databases of franchise operators, (iii) referrals from existing borrowers,
(iv) referrals from franchisors and franchisor personnel, (v) advertisements
in industry journals and franchisor house publications and (vi) direct mail
campaigns.

The Company's compensation structure for marketing executives is primarily
performance based. The Company employs a risk- and profitability-based
commission structure which provides the Company's marketing executives with an
incentive to originate loans with strong credit characteristics as well as
profitable terms. In addition, a portion of the commission is deferred and
paid only to the extent loans continue to perform. The Company believes that
the deferred aspect of the compensation system has helped minimize disruptions
associated with sales force turnover.

The Company's marketing executives also play a key role in the early stages
of the Company's underwriting process. These executives typically perform
field underwriting analyses utilizing the Company's proprietary desktop
underwriting and risk rating models to analyze the qualifications,
characteristics and risks of the franchisee borrower and the proposed
transaction. In addition, marketing executives often work with the Company's
corporate underwriting group to evaluate and structure proposed transactions,
providing the customer with prompt feedback regarding the viability of the
proposed financing. The Company believes that its rapid response time provides
it with a competitive advantage in the marketplace.

UNDERWRITING

The Company originates loans pursuant to underwriting guidelines designed to
meet rating agency and institutional market requirements for loan
securitizations.

The Company's underwriting methodology generally involves four levels of
analysis: (i) the specific industry and franchise concept, (ii) the
consolidated operating performance of the borrowing entity and affiliates,
(iii) the specific borrowing entity and (iv) the characteristics of the
individual stores and specific transaction.

Industry and Concept Approval

A critical factor underlying the Company's growth has been its ability to
identify industries and franchise concepts which exhibit characteristics that
meet the general market requirements for loan securitizations. The Company
evaluates industry data to determine performance of various franchise market
segments and particular franchise concepts within these segments, unit and
same store sales growth and profitability and potential competition. Concepts
within specific industries are evaluated to determine (i) the degree of
franchisor support (in terms of training, financial assistance and otherwise),
(ii) revenue and earnings growth, (iii) the franchise system fee structure,
(iv) litigation history, (v) brand name strength, sustainability and related
trademark value and (vi) other unique features. In addition, store closure and
default rates are reviewed in detail to discern the reasons for any store
closures or defaults that have occurred. After analyzing this information, the
Company creates a proprietary credit scoring and pricing model for each
franchise concept within its respective industry group.

Borrower and Loan Approval

The Company's approach to a given transaction analyzes the financial
strength and the historical performance of the following: (i) a consolidated
analysis of the borrowing entity and its affiliates, (ii) an analysis

46
<PAGE>

of the borrowing entity on a stand-alone basis, (iii) a consolidated analysis
of the stores pledged as collateral for the loan and (iv) an individual
analysis of the stores pledged as collateral. The approach examines (i)
historical trends in sales, cost of goods sold, labor costs and cash flow,
(ii) sustainability of sales and operating margins, (iii) performance relative
to system average, and (iv) the ability to meet debt service requirements on a
historical and projected basis. The Company also reviews the overall liquidity
of the principal individuals involved as well as the borrowing entity and its
affiliates, experience of the operator, seasoning of the stores to be pledged,
market share, capital expenditure needs, reporting capabilities, depth of
management and employee turnover rates.

The Company underwrites franchise loans primarily on the basis of
sustainable cash flows and enterprise value (i.e., the price an independent
prospective buyer would pay for the operating business), rather than solely on
the value of real estate and personal property collateral attributable to the
store. In approximately 38% of all loans originated by the Company, the
borrower has pledged a fee interest in real estate. By valuing franchise
businesses based on enterprise value, the Company is typically able to offer
greater loan proceeds to seasoned multi-unit franchisees of targeted national
and regional franchise concepts than traditional lenders. Moreover, the
Company's recognition of cash flow and brand value in addition to hard asset
collateral value allows it to offer more flexible terms and conditions than
conventional loans available to franchisees. The Company generally seeks
seasoned multi-unit franchisees with three or more years experience as a
franchisee and at least two years in the specific concept, enabling the
Company to use the franchisee's track record as a basis upon which to evaluate
its operating capabilities and creditworthiness.

Enterprise value is determined by third-party valuation consultants
utilizing a valuation methodology that generally takes into account an
analysis of historical sales and cash flow data, operating statements, site
inspections, management interviews and a database of comparable transactions
which indicates a valuation range relative to sales and cash flow margins for
stores within a specific franchise concept. Once these components are
analyzed, an enterprise valuation is calculated. Total value, the sum of such
enterprise value and the value of any underlying real property collateral, is
used in the determination of a loan to value ratio, which is generally limited
to 70%.

The Company also calculates a ratio of cash flow to fixed charges for each
loan (the "Fixed Charge Coverage Ratio" or "FCR") in order to determine the
borrower's ability to repay the proposed loan. The Company generally requires
a minimum FCR of 1.15x to 1.35x per franchise unit based on the strength of
the transaction and the collateral being provided. Underwriting differences
between transactions may result from variations in sales and cash flow margins
of the specific stores compared to average data for stores in the franchise
concept, the type of collateral and the strength of the borrowing entity. By
analyzing such data against concept averages, the Company can benchmark the
performance of the stores and the borrower relative to other units and
franchisees within the same concept.

Maximum loan proceeds per unit are generally limited to the lesser of
amounts determined by (i) a loan to value ratio no greater than 70%, (ii) a
minimum FCR based on the concept, transaction and applicable collateral type
pledged and (iii) an absolute loan amount per unit based on the industry and
concept, but typically no greater than $2,500,000. The restrictions described
above are applied on a consolidated basis where multiple stores owned by a
single borrower or group of affiliated borrowers serve as collateral for each
loan made to such borrower or group.

In addition to analyzing a borrower's ability to pay, the Company relies on
a review of credit reports and credit histories with suppliers, lenders and
the franchisor. The Company believes that its relationships with franchisors,
its experience in the franchise business, its knowledge of principal
participants in the industry and the information contained in its extensive
proprietary databases of franchise industry contacts provide it with insight
into the creditworthiness of an applicant.

An applicant's proposed use of proceeds is also closely evaluated as part of
the underwriting process. Typical uses include the refinancing of existing
debt, unit renovation, expansion or improvements, the purchase of new
equipment, new unit development, the purchase of underlying leased real
estate, entity reorganization (buyout of stockholders, retirement of
stockholder loans), working capital or unit acquisition.

47
<PAGE>

Underwriting Process

The Company's underwriting process is comprised of five distinct steps: (i)
field underwriting, (ii) initial underwriting department review, (iii)
valuation due diligence, (iv) comprehensive underwriting and (v) officer
review.

Field underwriting involves a preliminary review of a potential borrower's
financial position and business operations by a regional marketing executive
of the Company utilizing proprietary valuation and underwriting models
developed by the Company. The field underwriting is designed to determine the
feasibility, approximate loan size, pricing and terms of a proposed loan prior
to the submission of a loan application. The field underwriting is generally
performed by the marketing executive but may involve underwriting personnel
depending upon the complexity of the proposed transaction.

Upon acceptance of a loan proposal, an application is submitted to the
underwriting department for evaluation. The underwriting department begins an
initial review of the application to determine whether the Company should
proceed with the loan. The initial underwriting review is designed to identify
and address any major issues that might arise in the proposed transaction
before third-party vendors are engaged or the comprehensive underwriting
analysis begins.

As part of the underwriting process, valuation consultants from national
accounting firms are engaged to assist the Company in its investigation. These
consultants provide supplemental valuation analyses and independent third-
party estimates of the enterprise value, real estate value (in cases where
real estate is pledged as collateral) and unit level cash flow of the proposed
collateral.

Based on the requirements of the specific transaction, Company underwriters
will perform a field investigation which will include management interviews
and site inspections. The underwriting group will prepare a loan committee
memorandum which incorporates a comprehensive analysis of the proposed
transaction including an evaluation of unit level economics, consolidated
financial performance of the borrower and affiliated entities and a review of
management, transaction structure, credit and documentation.

The loan committee memorandum is submitted for review to one or more
designated Company officers (depending on the size of the proposed
transaction) with loan approval authority who will make the final
determination whether to grant, modify or deny the loan request.

CUSTOMERS

The Company's customer base consists of operators of established national
and regional franchise concepts which exhibit strong and stable growth and
performance. The Company targets the strongest operators in each franchise
concept, seeking seasoned multi-unit operators within those concepts. The
Company has approved more than 50 concepts for inclusion in its lending
program, and to date has made loans to franchisees operating in 19 of these
concepts. The Company believes that each of these concepts has experienced low
store closure rates, has a proactive commitment by the franchisor to support
and grow the system and has effective management and a strong infrastructure
to support a diversified operation.

48
<PAGE>

The following table sets forth the Company's loan originations by franchise
concept for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
---------------------------------------- -------------------------------- -------------------------------
AGGREGATE AGGREGATE AGGREGATE
NUMBER OF ORIGINAL NUMBER OF ORIGINAL NUMBER OF ORIGINAL
LOANS LOAN % OF TOTAL LOANS LOAN % OF TOTAL LOANS LOAN % OF TOTAL
ORIGINATED BALANCE ORIGINATED ORIGINATED BALANCE ORIGINATED ORIGINATED BALANCE ORIGINATED
----------- ------------- ----------- ---------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurants:
Applebees.......... -- $ -- --% 1 $ 1,580 0.9% -- $ -- --%
Arby's............. -- -- -- 76 36,939 20.6 -- -- --
Burger King........ 23 14,517 15.6 100 74,747 41.7 58 42,334 37.1
Carl's Jr.......... -- -- -- 1 590 0.3 -- -- --
Dairy Queen........ -- -- -- 3 1,700 0.9 -- -- --
Denny's............ 2 1,548 1.7 -- -- -- 2 1,600 1.4
El Pollo Loco...... -- -- -- 5 2,717 1.5 6 3,175 2.8
Hardee's........... -- -- -- 4 2,300 1.3 -- -- --
IHOP............... -- -- -- 2 1,566 0.9 -- -- --
In-n-Out Burger.... 1 1,120 1.2 -- -- -- -- -- --
Jack-in-the-Box.... 3 1,753 1.9 5 3,430 1.9 2 1,100 1.0
KFC................ 42 35,760 38.5 21 18,700 10.4 1 275 0.2
Papa John's........ -- -- -- 8 1,750 1.0 -- -- --
Pizza Hut.......... 9 4,100 4.4 -- -- -- -- -- --
Taco Bell.......... 1 880 0.9 24 15,815 8.8 20 16,900 14.8
TGI Friday's....... -- -- -- 2 3,000 1.7 -- -- --
Wendy's............ 4 3,301 3.6 17 14,619 8.1 51 26,372 23.1
--------- ------------- ----------- --- -------- ----- --- -------- -----
Total Restaurant:... 85 62,979 67.8 269 179,453 100 140 91,756 80.4
--------- ------------- ----------- --- -------- ----- --- -------- -----
Specialty Retail:
Blockbuster........ 1 775 0.8 -- -- % -- 33 22,415 19.6
Jiffy Lube......... 59 29,127 31.4 -- -- -- -- -- --
--------- ------------- ----------- --- -------- ----- --- -------- -----
Total Specialty
Retail:............ 60 29,902 32.2 -- -- -- 33 22,415 19.6
--------- ------------- ----------- --- -------- ----- --- -------- -----
Total............... 145 $ 92,881 100.0% 269 $179,453 100.0% 173 $114,171 100.0%
========= ============= =========== === ======== ===== === ======== =====
</TABLE>

49
<PAGE>

FINANCING

The Company relies on financing to fund its lending activities. The
Company's financing requirements are expected to increase to the extent that
its volume of loan originations increases. The Company's principal cash
requirements include the funding of (i) permanent loans pending securitization
or sale, construction loans and delinquent or defaulted loans pending
liquidation, (ii) fees and expenses incurred in connection with its
securitization program, (iii) overcollateralization, reserve account
requirements or other enhancement costs in connection with securitized loans,
(iv) interest, fees and expenses associated with the Warehouse Line and the
Facility and any other line of credit or similar facility into which the
Company may enter in the future, (v) federal and state income tax payments and
(vi) ongoing administrative and other operating expenses. The Company
currently funds these cash requirements primarily through securitizations and
borrowings from FFC under the Warehouse Line and the Facility. See "Risk
Factors -- Substantial Need for Liquidity to Fund Lending Activities" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The Company's primary sources of funds are described below.

Lines of Credit

A portion of the Company's cash requirements is currently funded through the
Warehouse Line and the Facility, its two credit facilities with FFC. The
Warehouse Line provides a revolving credit facility which permits the Company
to borrow up to $300 million (which will be reduced to $250 million in October
1998) solely for the purpose of purchasing, originating or financing loans.
Each loan funded by the Company through the Warehouse Line is treated as
collateral for the Company's borrowings under the Warehouse Line. Proceeds
under the Warehouse Line and the Facility may be used by the Company to make
permanent loans and construction loans in certain approved franchise concepts,
provided that each such loan conforms with the guidelines contained in the
Company's underwriting manual, is processed in accordance with Company's
processing manual and is documented using certain standard loan documentation.
The Company's borrowings under the Warehouse Line and the Facility may be used
to purchase, originate or finance other types of loans only as approved by FFC
on a case-by-case basis. The Company may borrow up to 95% of the initial
principal balance of a permanent loan or up to 100% of a construction loan
under the Warehouse Line. The Company may use the Facility to fund the
remaining 5% of the principal balance of a permanent loan.

The Company pays interest to FFC on its borrowings under the Warehouse Line
at a rate equal to LIBOR plus (i) 3.50% per annum for each construction loan,
(ii) 2.75% per annum for each converted construction loan during the one year
seasoning period immediately after store opening and (iii) 2.00% per annum for
each permanent loan. The Company would be required to pay a higher rate of
interest on any overdue payments. Under the terms of the Warehouse Line and
the Facility, the Company is not required to pay commitment, usage or non-
usage fees or points, and there are no restrictions on the amount of time a
loan may remain outstanding, so long as the Company continues to hold the
Loan.

FFC generally has no recourse to the Company or its assets, other than
loans, for payment of the amounts due under the Warehouse Line. In the event
that no payment of principal or interest is made for a period of 90 days with
respect to a loan made by the Company, FFC is entitled to foreclose on such
loan. The Warehouse Line provides that in very limited circumstances,
involving loss to FFC occasioned by willful misfeasance or false or misleading
representations made in bad faith by the Company, FFC shall have full recourse
to the Company and its assets for payments becoming due as a result of or
accruing after such event. The Warehouse Line is scheduled to terminate, and
all borrowings thereunder to become immediately due and payable, on December
31, 1999. The Company is currently negotiating additional warehouse lines of
credit with a third party lender, but there can be no assurance that financing
through borrowings in an amount sufficient to satisfy the Company's future
cash requirements will be available on acceptable terms, if at all.

Under the terms of the Facility, FFC will provide the Company with up to $20
million in revolving loans, to be used solely for one or more of the following
purposes: (i) to fund no more than 15% of the principal amount of a loan, (ii)
to support pricing on securitization or whole loan sales by the Company upon
terms approved by

50
<PAGE>

FFC ("Support Loans"), (iii) to pay for Company expenses up to an aggregate of
$1 million and (iv) to fund any other use approved in writing by FFC. The
Company pays FFC interest on its borrowings under the Facility at a rate equal
to (i) the Applicable Treasury Rate (as defined therein) plus 7% per annum for
all Support Loans and (ii) LIBOR plus 7.5% per annum for all other types of
approved loans. The Company's obligations to FFC under the Facility are
subordinated and junior in right of payment to its corresponding obligations
to FFC under the Warehouse Line.

The Facility also provides that the Company may not incur an aggregate
amount of additional indebtedness in excess of $250,000 from third parties
without FFC's consent. Further, under the terms of the Facility, the Company
may not (i) pay dividends or make distributions on its equity securities, (ii)
purchase, redeem, or retire its equity securities or (iii) make any
distribution of assets, equity securities, obligations or other securities to
any holder of its equity securities. Finally, the Company may be treated as
having defaulted under the Facility in the event that Messrs. Elder and Brazy
cease to be actively involved in the management of the Company. The Facility
is scheduled to terminate as of December 31, 1999.

Securitizations

The Company currently originates all of its loans with the intention of
securitizing them. The Company has completed two securitizations since 1995.
The Company plans to effect quarterly securitizations beginning in the second
quarter of 1998. There can be no assurance that the Company will be successful
in completing securitizations on a quarterly basis or at all. See "Risk
Factors -- Substantial Dependence on Securitizations." At the close of a
securitization, the Company removes from its balance sheet the loans held for
sale and adds to its balance sheet (i) the cash received and (ii) the
estimated fair value of the retained interests in the loans sold that are held
by a non-consolidated subsidiary of the Company. The excess of the cash
received and assets retained over the carrying value of the loans sold, less
transaction costs, equals the net gain on sale of the loans recorded by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview -- Accounting for Gain on Sale of Loans;
Retained Interests in Loans Sold."

The following table sets forth securitization transactions involving loans
originated and securitized by the Company:

<TABLE>
<CAPTION>
ORIGINAL OUTSTANDING
ISSUANCE PRINCIPAL CUMULATIVE
PRINCIPAL AMOUNT AT LOSSES AT
ISSUER DATE ISSUED AMOUNT MARCH 31, 1998 MARCH 31, 1998
------------------------ ---------------- --------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Video Franchise Capital
Trust 1996-1........... January 24, 1996 $22,415 $16,419 $ --
Atherton Franchisee Loan
Funding 1997-A LLC..... March 14, 1997 $97,276 $92,457 $ --
</TABLE>

In addition, between 1993 and 1995, Messrs. Elder and Brazy structured three
securitizations on behalf of entities other than the Company, in the aggregate
principal amount of $187.6 million, relating to loans in the QSR and retail
video franchise segments.

LOAN SERVICING AND CREDIT QUALITY

The Company currently outsources the administrative aspects of servicing all
loans it originates (securitized and warehoused) to a third-party servicer.
Under its servicing contract with the Company, the servicer is paid a fee to
perform the administrative functions such as collection of principal and
interest payments, distribution of proceeds, monitoring of insurance
requirements, distribution of late payment notices and record keeping. The
Company retains a role as the servicing advisor in all of its transactions,
for which it receives a substantial portion of the total servicing revenue. As
servicing advisor, the Company maintains its relationships with borrowers and
key franchisors and can ensure a high level of customer service. In addition,
as servicing advisor, the Company participates in addressing any collection
issues and workouts of troubled loans. The Company's cost of collections
historically has not been material. There can be no assurance, however, that
such costs will not become material in the future.

51
<PAGE>

At March 31, 1998, the Company had four loans to two borrowers, amounting to
$2.3 million, or less than 1% of all loans held in the Company's servicing
portfolio, more than 30 days delinquent. One of the Company's borrowers has
declared bankruptcy with respect to one franchise property pledged as
collateral for a loan extended by the Company in the amount of $267,000. From
its inception in February 1995 through March 31, 1998, the Company had
experienced no charge-offs.

INTEREST RATE RISK MANAGEMENT

The Company's profitability may be adversely affected during any period of
unexpected or rapid changes in interest rates. For example, in an inflationary
economy, interest rates normally increase. A substantial and sustained
increase in interest rates, whether due to inflation or otherwise, could
adversely affect the Company's ability to originate loans. The Company's
profitability may be directly affected by fluctuations in interest rates which
affect the Company's ability to earn a spread between interest received on its
loans held for sale and rates of interest paid by the Company on the Warehouse
Line, the Facility and/or any other lines of credit. If prevailing interest
rates rise, the Company may need to increase the required discount rate used
in determining the value of its retained interests in securitizations, thus
reducing the Company's gain on sale. In addition, the Company may be required
to record an expense, reducing the carrying value (on a consolidated basis) of
retained interests in prior loan securitizations.

The Company's hedging strategy normally includes acquiring interest rate
swaps in such amounts and maturities as to effectively hedge the interest rate
volatility of its portfolio. The Company does not maintain uncovered or
leveraged hedge positions. While the Company believes its hedging strategies
are cost-effective and provide some protection against interest rate risks,
there can be no assurance that the Company's hedging strategy will protect the
Company from such risks. Further, the Company does not believe that hedging
against interest rate risks associated with floating rate loans is cost-
effective, and the Company does not utilize hedging transactions with respect
to its floating rate loans.

All of the Company's interest rate swaps are currently provided by Koch
under an interest rate swap agreement. Koch, through its subsidiary FFC, holds
a substantial equity interest in the Company and provides loans to the Company
under the Warehouse Line and the Facility. As a result, the Company believes
that Koch has a vested interest in protecting the Company from interest rate
fluctuations by providing interest rate swaps. There can be no assurance,
however, that FFC will retain its equity interest in the Company or continue
to provide interest rate swaps or loans to the Company after the maturity date
of the Warehouse Line and the Facility. To the extent that the Company is
unable to obtain such swaps from Koch or another party, the Company will be
exposed to a substantially increased risk of financial loss resulting from
interest rate fluctuations. See "Risk Factors -- Significant Reliance on
Relationship with Koch Industries" and "-- Interest Rate Fluctuations."

COMPETITION

The Company faces intense competition in the business of originating and
selling loans. Competitors in the financial services business include
commercial banks, thrift institutions, diversified finance companies, asset-
based lenders, specialty franchise finance companies and real estate
investment trusts. Many of these competitors in the commercial finance
business are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. Competition can take many
forms, including convenience to customers in obtaining loans, customer
service, marketing and distribution channels, amount and term of loans and
interest rates. See "Risk Factors -- Competition."

REGULATION

General

Certain aspects of the Company's business are subject to regulation and
supervision at both the federal and state levels. Regulated matters include
loan origination, credit activities, maximum interest rates and finance and

52
<PAGE>

other charges, disclosure to customers, collection, foreclosure, repossession
and claims handling procedures utilized by the Company, multiple qualification
and licensing requirements for doing business in various jurisdictions and
other trade practices. The Company is required to maintain commercial lending
licenses in certain states in order to originate loans. The inability of the
Company to obtain, maintain or renew such licenses would have a material
adverse effect on the Company's business, financial condition and results of
operations. The laws, rules and regulations applicable to the Company are
subject to modification and change. There can be no assurance that other laws,
rules or regulations applicable to the Company will not be adopted in the
future, which could make compliance more difficult or expensive, restrict the
Company's ability to originate or sell loans, limit the amount of interest and
other charges earned on loans originated or sold by the Company, or otherwise
adversely affect the business or prospects of the Company.

Contamination by hazardous substances of real property securing the
Company's loans may give rise to a lien on such property to assure payment of
the cost of clean-up or, in certain circumstances, subject the Company to
liability. Such contamination may also reduce the value of the property. Under
the Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") and the laws of some states, a lender may become liable
for cleanup of a property and adjacent properties that are contaminated by
releases from the property if the lender engages in certain activities. See
"Risk Factors -- Loan Underwriting and Credit Quality Risks -- Environmental
Liability."

Environmental Laws Affecting Borrowers in Specific Segments

The operation and management of franchise businesses may subject the
Company's franchise borrowers, particularly in the area of retail energy
business, to regulation and potential liabilities with respect to the use and
storage of hazardous materials. In addition, borrowers may be required to
obtain various environmental permits and licenses in connection with their
operations and activities and comply with various health and safety
regulations adopted by federal, state, local and foreign authorities governing
the use and storage of such hazardous materials. Under various federal, state,
local and foreign laws, ordinances and regulations, various categories of
persons, including owners, operators or managers of real property, may be
liable for the costs of investigation, removal and remediation of hazardous
substances that are or have been released on or in their property even if such
releases were by former owners or occupants. In addition, any liability of
borrowers for assessment and remediation activities in connection with
releases into the environment of gasoline or other regulated substances from
USTs or otherwise at such borrowers' gasoline facilities could adversely
impact such borrowers' ability to repay their loans from the Company or the
value of any pledged collateral.

Historically, a major impediment to lending to RGOs was the risk of
environmental liability. Recently, insurance companies have been issuing
policies to secured lenders to cover certain of these risks. The Company
requires that such environmental insurance be obtained with respect to certain
environmental costs and liabilities. There can be no assurance that such
policies will cover all such environmental costs or will remain available in
the future.

EMPLOYEES

At March 31, 1998, the Company employed 37 persons. None of the Company's
employees is subject to a collective bargaining agreement. The Company
believes that its relations with its employees are good.

PROPERTIES

The Company's executive and administrative offices are located at 1001
Bayhill Drive, Suite 155, San Bruno, California 94066, and consist of
approximately 9,400 square feet. The lease on the premises expires on
October 31, 2003, and the current annual rent is approximately $262,000.

The Company also leases space for its other offices. These facilities are
executive suite type leases, with an annual aggregate base rental of
approximately $87,000. These leases are generally short-term, but vary as to
duration and rent escalation provisions.

53
<PAGE>

LEGAL PROCEEDINGS

The Company occasionally becomes involved in litigation arising from the
normal course of its business. Management believes that any liability with
respect to pending legal actions, individually or in the aggregate, will not
have a material adverse effect on the Company's business, financial condition
or results of operations.

54
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 1, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David L. Elder........ 51 Chief Executive Officer and Director
Arthur P. Brazy, Jr... 39 President and Director
Mark H. McGourty...... 41 Senior Vice President and Chief Financial Officer
Richard L. Meiklejohn. 48 Senior Vice President, Loan Originations
Jeffrey R. Thompson... 37 Director
Richard A. Doppelt ... 43 Director
</TABLE>

David L. Elder. Mr. Elder co-founded the Company with Mr. Brazy in March
1997, was its President from March 1997 to September 1997, and has served
since that date as Chief Executive Officer and a director of the Company. Mr.
Elder has been President of TAG, a stockholder of the Company, since its
inception in 1989. TAG was the general partner of ACP, the Company's
predecessor, from February 1995 to March 1997. From April 1987 to December
1989, Mr. Elder was an Executive Vice President of Drexel Burnham Realty and
directed its west coast real estate investment banking group. From February
1980 to March 1987, Mr. Elder served in a number of positions relating to real
estate investment, management and acquisitions at Landsing Property
Corporation. Mr. Elder received a B.S. degree in economics from Oklahoma State
University and an M.B.A. from the Graduate School of Business at Stanford
University.

Arthur P. Brazy, Jr. Mr. Brazy co-founded the Company with Mr. Elder in
March 1997, was its Executive Vice President from March 1997 to September
1997, and currently serves as its President and a director. Mr. Brazy served
as Executive Vice President of TAG, the general partner of ACP, the Company's
predecessor, from February 1995 to March 1997. From January 1992 to February
1995, Mr. Brazy worked with Mr. Elder and TAG in developing and structuring
various franchise loan securitization transactions. In March 1991, Mr. Brazy
co-founded Franchise Mortgage Acceptance Co., L.P. ("FMAC"). Before co-
founding FMAC, Mr. Brazy was a Vice President in the Investment and Finance
Group of Eastdil Realty, a diversified real estate investment bank co-owned by
Nomura Securities. Mr. Brazy received a B.S. degree in economics from the
California Institute of Technology and an M.B.A. from the Graduate School of
Business at Stanford University. Mr. Brazy pursued further graduate studies as
a fellow at Oxford University.

Mark H. McGourty. Mr. McGourty has served as a Senior Vice President and
Chief Financial Officer of the Company since its inception in March 1997. Mr.
McGourty served in the same position at TAG from July 1996 to March 1997, and
was Vice President of Finance of TAG from December 1995 to July 1996. From
February 1995 to December 1995, Mr. McGourty served as Vice President of
Operations for Deepa Textiles, a textile design firm. Mr. McGourty was a co-
founder and served as Chief Executive Officer of Brokers Acceptance
Corporation, a residential mortgage lender, from July 1993 to January 1995.
From December 1985 to June 1993, Mr. McGourty served in various positions,
including Senior Vice President, Chief Financial Officer and a director, of
First California Mortgage Company, a residential mortgage lender. Mr. McGourty
served as a Vice President and Controller of The Associates, a commercial and
consumer finance company, from December 1982 to December 1985, and as a Senior
Auditor at Ernst & Young from August 1979 to December 1982. Mr. McGourty
received a B.S. degree in business administration from the University of
California, Berkeley.

Richard L. Meiklejohn. Mr. Meiklejohn has served as Senior Vice President,
Loan Originations of the Company since joining the Company in September 1997.
From June 1987 to September 1997, Mr. Meiklejohn served in various capacities
in the marketing and credit departments at Citicorp North America, Inc., most
recently as Marketing Manager-Franchise Finance. Mr. Meiklejohn was Vice
President of Middle Market Lending at Commercial Center Bank from October 1982
to June 1987, and held various positions at Royal Bank

55
<PAGE>

of Canada from 1975 to 1982. Mr. Meiklejohn received a Bachelor of Commerce
degree, with honors, from Queen's University, Ontario, Canada.

Jeffrey R. Thompson. Mr. Thompson has been a director of the Company since
March 1997. Mr. Thompson has served in various capacities with Koch since June
1992 and is currently Senior Vice President, Capital Services. Mr. Thompson
also serves on the boards of directors of various entities affiliated with
Koch. Mr. Thompson received B.S. degrees in both Business Administration and
Accounting from the University of Kansas.

Richard A. Doppelt. Mr. Doppelt has been a director of the Company since
June 1998. Mr. Doppelt has been a member of Allstate Private Equity, a
division of Allstate Insurance Company, since August 1987 and is currently a
Director of Allstate Private Equity. Previously, Mr. Doppelt was a corporate
attorney associated with the law firm of Morrison & Foerster. Mr. Doppelt is
currently a director of Sunrise Assisted Living, a company providing assisted
living services to the elderly, and of Factory Card Outlet, a specialty retail
chain for greeting cards, party goods and related merchandise. Mr. Doppelt
received a B.S. degree in business administration from the University of
California, Berkeley, a J.D. from Harvard Law School, and an M.B.A. from the
Graduate School of Business at Stanford University.

Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any of the directors or executive officers of the Company.

BOARD COMPOSITION

Directors of the Company are currently elected annually by its stockholders
to serve during the ensuing year or until their respective successors are duly
elected and qualified. Pursuant to the Stockholders Agreement among the
Principal Stockholders, for so long as FFC (i) owns at least 15% of the
Company's outstanding Common Stock on a fully diluted basis and (ii) continues
to lend to the Company under the Warehouse Line, the Principal Stockholders
have agreed to elect one FFC nominee to the Company's Board of Directors.
Mr. Thompson is currently serving on the Company's Board of Directors as the
nominee of FFC. The Company's Board of Directors currently has one vacancy,
which the Company's Bylaws authorize the Board of Directors to fill. The
Company intends to appoint one person who is not an officer or employee of the
Company to the Board of Directors within 90 days after consummation of this
Offering and is required to do so to maintain its listing on the Nasdaq
National Market. In the event the Company does not add such independent
director within 90 days following the Offering, the Company could be delisted
from the Nasdaq National Market, which could have an adverse effect on the
liquidity and price of the Company's Common Stock.

BOARD COMMITTEES

The Board of Directors currently has no committees. In connection with the
Offering, the Company intends to appoint an Audit Committee and a Compensation
Committee.

The Audit Committee will be comprised of Mr. Doppelt and one other
independent director to be appointed after the Offering. The Audit Committee
will review and, as it deems appropriate, recommend to the Board of Directors
the internal accounting and financial controls for the Company and the
accounting principles and auditing practices and procedures to be employed in
preparation and review of the financial statements of the Company. The Audit
Committee will make recommendations to the Board concerning the engagement of
independent public accountants and the scope of the audit to be undertaken by
such accountants.

The Compensation Committee will be comprised of Mr. Doppelt and one other
independent director to be appointed after the Offering. The Compensation
Committee will review and, as it deems appropriate, recommend to the Board of
Directors policies, practices and procedures relating to the compensation of
officers and other managerial employees and the establishment and
administration of employee benefit plans. The Committee will

56
<PAGE>

exercise all authority under the Company's employee equity incentive plans and
advise and consult with the officers of the Company as may be requested
regarding managerial personnel policies.

DIRECTOR COMPENSATION

Effective upon consummation of this Offering, the Company's directors who
are not officers or employees of the Company or nominees of FFC will be paid
an annual retainer of $12,000 and a fee of $1,000 for each meeting of the
Board of Directors or of a committee of the Board attended by such independent
director. See "-- 1997 Stock Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to this Offering, the Company did not have a Compensation Committee,
and decisions concerning executive officer compensation were deliberated upon
by the Board of Directors. Messrs. Elder and Brazy, directors and executive
officers of the Company, served as directors and executive officers of Net
Capital Incorporated during 1998. The Boards of Directors of the Company and
Net Capital Incorporated did not have compensation committees and all of the
directors on each board participated in compensation decisions.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Section 102 of the DGCL authorizes a Delaware corporation to include a
provision in its certificate of incorporation limiting or eliminating the
personal liability of its directors to the corporation and its stockholders
for monetary damages for breach of the directors fiduciary duty of care. The
duty of care generally requires that, when acting on behalf of the
corporation, directors' exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by such provision, directors are accountable to corporations and
their stockholders for monetary damages for conduct constituting gross
negligence in the exercise of their duty of care. Although Section 102 of the
DGCL does not change a director's duty of care, it enables corporations to
limit available relief to equitable remedies such as injunction or rescission.
The Company's Certificate of Incorporation and Bylaws include provisions which
limit or eliminate the personal liability of its directors to the fullest
extent permitted by Section 102 of the DGCL. Consequently, a director or
officer will not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for (i)
any breach of the directors duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases, redemptions or other
distributions, and (iv) any transaction from which the director derived an
improper personal benefit.

The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify to the full extent permitted by law any person made or
threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such persons testator or intestate is or was a director,
officer or employee of the Company or serves or served at the request of the
Company as a director, officer or employee. The Certificate of Incorporation
and Bylaws provide that expenses, including attorneys' fees, incurred by any
such person in defending any such action, suit or proceeding will be paid or
reimbursed by the Company promptly upon receipt by it of an undertaking of
such person to repay such expenses if it is ultimately determined that such
person is not entitled to be indemnified by the Company.

The Company intends to enter into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Certificate of Incorporation and Bylaws. In these agreements, the
Company, among other things, will agree to indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such persons services as a director or executive officer of the
Company, any subsidiary of the Company or any other

57
<PAGE>

company or enterprise to which the person provides services at the request of
the Company. In addition, the Company has obtained directors' and officers'
insurance providing indemnification for certain of the Company's directors,
officers and employees for certain liabilities. The Company believes that
these indemnification provisions and agreements are necessary to attract and
retain qualified directors and officers.

The limited liability and indemnification provisions in the Company's
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty
(including breaches resulting from grossly negligent conduct) and may have the
effect of reducing the likelihood of derivative litigation against directors
and officers, even though such an action, if successful, might otherwise
benefit the Company and it stockholders. Furthermore, a stockholder's
investment in the Company may be adversely affected to the extent the Company
pays the costs of settlement and damage awards against directors and officers
of the Company pursuant to the indemnification provisions in the Company's
Certificate of Incorporation and Bylaws. The limited liability provisions in
the Certificate of Incorporation and Bylaws will not limit the liability of
directors or officers under federal securities laws.

At present, there is no pending litigation or proceeding involving any
director, officer or employee of the Company where indemnification is expected
to be required or permitted, and the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation paid
during the year ended December 31, 1997 to the Company's Chief Executive
Officer and each of the Company's other most highly compensated executive
officers for services rendered to the Company during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
------------------ ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
David L. Elder ......... 220,004 75,000 -- 7,200 (1)
Chief Executive Officer
Arthur P. Brazy, Jr..... 198,000 75,000 -- 7,450 (1)
President
Mark H. McGourty........ 166,700 212,500 (2) 745,380 4,800 (1)
Senior Vice President
and Chief Financial
Officer
Richard L. Meiklejohn
(3).................... 78,750 -- 372,690 1,408(4)
Senior Vice President,
Loan Originations
</TABLE>
- --------
(1) Represents car allowances.
(2) Includes bonus paid in 1997 of $87,500 and bonus accrued in 1997 and paid
on January 15, 1998 of $125,000.
(3) Mr. Meiklejohn joined the Company in September 1997.
(4) In connection with Mr. Meiklejohn's employment, the Company agreed to
provide Mr. Meiklejohn with an interest-free loan of $100,000 to be used
for the purchase of a residence. The loan will be forgiven over a period
of four years. As of December 31, 1997, Mr. Meiklejohn had not borrowed
such amount.

58
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information concerning stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 1997:

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM (3)
OPTIONS IN 1997 EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (1) (2) PER SHARE DATE 5% ($) 10% ($)
------------------------ ----------- ---------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David L. Elder.......... -- -- -- -- -- --
Arthur P. Brazy, Jr..... -- -- -- -- -- --
Mark H. McGourty........ 745,380 46.2% $1.43 9/30/07 $ -- $ --
Richard L. Meiklejohn... 372,690 23.1% $1.43 9/30/07 $ -- $ --
</TABLE>
- --------
(1) The options in this table are incentive stock options granted under the
1997 Stock Plan and vest over four years, except that the vesting of Mr.
McGourty's options may be accelerated in certain circumstances involving a
change of control.
(2) In 1997, the Company granted employees options to purchase an aggregate of
1,614,987 shares of Common Stock.
(3) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.

AGGREGATED OPTION EXERCISES IN 1997 AND DECEMBER 31, 1997 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David L. Elder........... -- -- -- --
Arthur P. Brazy, Jr...... -- -- -- --
Mark H. McGourty......... -- 745,380 -- $909,364
Richard L. Meiklejohn.... -- 372,690 -- $454,682
</TABLE>
- --------
(1) Based on the fair market value of $2.65 per share as of December 31, 1997
as determined by the Company's Board of Directors, less the exercise price
per share.

No Named Executive Officer exercised any options during the fiscal year
ended December 31, 1997.

1997 STOCK PLAN

The Company's 1997 Stock Plan was approved by the Board of Directors and the
stockholders of the Company in October 1997, and the Company intends to amend
and restate the 1997 Plan prior to the Offering (as amended, the "1997 Stock
Plan"). The 1997 Stock Plan provides for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), to employees (including officers and employee directors)
and for the grant of nonstatutory stock options and stock purchase rights
("SPRs") to employees, directors and consultants. A total of 2,323,100 shares
of Common Stock are currently reserved for issuance pursuant to the 1997 Stock
Plan. Unless terminated sooner, the 1997 Stock

59
<PAGE>

Plan will terminate automatically in October 2007. As of March 31, 1998, there
were options to purchase an aggregate of 1,614,987 shares of Common Stock at a
weighted average exercise price of $1.43 per share outstanding under the 1997
Stock Plan.

The 1997 Stock Plan may be administered by the Board of Directors or a
committee of the Board of Directors (as applicable, the "Administrator"). The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price of the option or SPR, the number of
shares subject to each option or SPR, the exercisability thereof, and the form
of consideration payable upon such exercise. In addition, the Board of
Directors has the authority to amend, alter, suspend or terminate the 1997
Stock Plan, provided that no such action may affect any share of Common Stock
previously issued and sold or any option or SPR previously granted under the
1997 Stock Plan without the consent of the affected shareholder.

Options and SPRs granted under the 1997 Stock Plan are not generally
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1997 Stock Plan that are vested must generally be exercised within three
months after the end of the optionee's status as an employee, director or
consultant of the Company, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration
of the option's term. SPRs will be exercisable pursuant to a restricted stock
purchase agreement (each, a "Restricted Stock Purchase Agreement"). Unless the
Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchasers employment with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to a Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator.

The exercise price of all incentive stock options granted under the 1997
Stock Plan as determined by the Administrator must be at least equal to the
fair market value of the Common Stock on the date of grant. The exercise price
of nonstatutory stock options and SPRs granted under the 1997 Stock Plan is
determined by the Administrator, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be
equal to the fair market value of the Common Stock on the date of grant. With
respect to any participant who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive or nonstatutory stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive or nonstatutory stock option must not exceed five years. The
term of all other options granted under the 1997 Stock Plan may not exceed ten
years. Until shares of Common Stock are issued upon exercise of options or
SPRs, optionees have no right to vote or receive dividends or any other rights
as stockholders by virtue of their having been granted options. Once the
option or SPR has been exercised, the purchaser shall have all rights of a
stockholder.

The 1997 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of all or substantially all of the
Company's assets, each option and SPR shall be assumed or an equivalent option
or SPR substituted for by the successor corporation.

Section 162(m) of the Code may limit the Company's ability to deduct for
United States federal income tax purposes compensation in excess of $1,000,000
paid to the Company's Chief Executive Officer and its four other most highly
compensated executive officers in any one fiscal year. Certain grants of
option or SPRs to employees under the 1997 Stock Plan will not be subject to
the deduction limitation if such grants are approved by stockholders or are
provided for in a plan that has been previously approved by stockholders. In
order to preserve the Company's ability to deduct the compensation associated
with options and SPRs granted to such persons, the 1997 Stock Plan, as
approved by the Company's stockholders, provides that no employee may be
granted options and SPRs to purchase more than shares of Common Stock
in any one fiscal year. Notwithstanding this

60
<PAGE>

limit, however, in connection with an employee's initial employment, he or she
may be granted options or SPRs to purchase up to an additional shares
of Common Stock.

EMPLOYEE STOCK PURCHASE PLAN

Concurrently with the Offering, the Board of Directors intends to adopt an
Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of
shares of Common Stock. The Purchase Plan, which is intended to
qualify as an employee stock purchase plan within the meaning of Section 423
of the Code, is administered by the Board of Directors or by a committee
appointed by the Board. Employees of the Company are eligible to participate
in the Purchase Plan if they are employed by the Company or a subsidiary of
the Company designated by the Board for at least 20 hours per week and are
customarily employed for more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed % of an employee's compensation,
subject to certain limitations. The Purchase Plan will be implemented in a
series of consecutive offering periods, each of approximately 24 months
duration. Offering periods will begin on the first trading day on or after
and each year and terminate on the last trading day in
the periods 24 months later. However, the first offering period shall be the
period of approximately months commencing on the date upon which the
Company's registration statement pursuant to this Offering is declared
effective by the Commission and terminating on the last trading day in the
period ending , 2000. Each participant in the Purchase Plan will
be granted an option on the first day of the offering period and such option
will be automatically exercised on the last trading date of each offering
period. The purchase price of the Common Stock under the Purchase Plan will be
equal to 85% of the lesser of the fair market value per share of Common Stock
on the start date of the offering period or on the last day of the offering
period. Employees may end their participation at any time, and participation
ends automatically on termination of an employee's employment with the
Company. The Purchase Plan will terminate ten years from the date of its
adoption unless earlier terminated by the Board of Directors.

401(K) PLAN

On July 1, 1997, the Company established a contributory retirement plan (the
"401(k) Plan") for all full-time employees with at least three full months of
service, which is designed to be tax deferred in accordance with the
provisions of Section 401(k) of the Code. The 401(k) Plan provides that each
participant may contribute up to 15% of his or her annual salary in an amount
not to exceed $10,000 for the year ended December 31, 1998. Employees may
elect to enroll in the plan on the first day of the fiscal quarter following
their first three months of employment. Subject to the rules for maintaining
the tax status of the 401(k) Plan, on an annual basis the Company may elect to
make a discretionary contribution to the 401(k) Plan. In May 1998, the Company
adopted a matching program for the 1998 plan year under which the Company will
contribute 50% of the first 4% of salary contributed by a participant for the
fiscal year ended December 31, 1998. Should an additional discretionary
contribution be made, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The additional contribution
would be equal to 50% of any deferral in excess of 4% up to a maximum deferral
of 8%. After this initial allocation, any remaining additional discretionary
contribution would be allocated as a 50% match of contributions on the first
4% of the employee's deferral. There was no discretionary contribution made to
the plan for the year ended December 31, 1997.

61
<PAGE>

CERTAIN TRANSACTIONS

ARRANGEMENTS WITH KOCH

Koch, through its wholly-owned subsidiary FFC, owns approximately 35% of the
Company's outstanding Common Stock. After the Offering, Koch will continue to
own % of the outstanding Common Stock ( % if the Underwriters' over-
allotment option is exercised in full). Jeffrey R. Thompson, the President of
FFC and a Senior Vice President of Koch Capital Services, is a director of the
Company. The Company and Koch have entered into various agreements and
arrangements during the past three fiscal years as described below.

Warehouse Line and Facility

The Warehouse Line, entered into on January 8, 1997 by the Company and FFC,
currently provides a revolving credit facility under which the Company may
borrow up to $300 million (which amount will be reduced to $250 million in
October 1998) at an interest rate of LIBOR plus 2.0-3.5% per annum on all of
its borrowings thereunder. On January 8, 1997 the Company and FFC entered into
the Facility, pursuant to which the Company may borrow up to $20 million
through a revolving credit line at an interest rate equal to the Applicable
Treasury Rate (as defined therein) or LIBOR plus 7.0-7.5% per annum. During
the fiscal year ended December 31, 1997, the Company's aggregate interest
payments to FFC under the Warehouse Line and the Facility totaled $6.3
million. The Warehouse Line and the Facility are scheduled to terminate, and
all borrowings thereunder to become immediately due and payable, on December
31, 1999. See "Business -- Financing -- Lines of Credit."

Interest Rate Swap Agreement

On March 11, 1997 the Company and Koch entered into an interest rate swap
agreement which governs the interest rate swap transactions regularly entered
into by Koch and the Company. During the year ended December 31, 1997, Koch
paid the Company an aggregate of $521,000 to settle swaps upon securitization
of the loans hedged pursuant to the agreement. The Company included such
amount in its gain on sale of loans recognized upon their securitization. In
addition, the Company paid Koch an aggregate of $936,000 during the year ended
December 31, 1997 to settle its swap position.

ARRANGEMENTS WITH PRINCIPAL STOCKHOLDERS AND TAG

Formation of ACP

Prior to the formation of ACP in February 1995, Messrs. Elder and Brazy
completed the following securitizations (the "Securitizations") on behalf of
entities other than the Company: (i) Video Franchise Capital Trust 1993-1
("Video 1993"), (ii) Video Franchise Capital Trust 1994-1 ("Video 1994") and
(iii) Atherton Franchise Capital Trust I-1994 ("AFCT 1994"). In the documents
governing the Securitizations, TAG was named as the servicing advisor for the
Securitizations. TAG subsequently assigned certain of its rights to receive
servicing advisor fees to Messrs. Elder and Brazy as compensation for services
performed. In connection with the formation of ACP in February 1995, the
partners of ACP, including TAG and Messrs. Elder and Brazy, contributed and
sold their rights to receive the servicing advisor fees for the
Securitizations to ACP. The interests contributed and sold by each partner to
ACP, and the consideration paid by ACP to each partner in exchange for such
interests, are as follows:

TAG contributed to ACP its right to receive 65.84% of the servicing
advisor fees for Video 1994, and in exchange for such right ACP (i) agreed
to perform TAG's duties as servicing advisor for Video 1993, Video 1994 and
AFCT 1994 and (ii) distributed a 1% general partner interest in ACP to TAG.
Mr. Elder contributed to ACP his rights to receive (i) 25.12% of the
servicing advisor fees for Video 1993, (ii) 34.16% of the servicing advisor
fees for Video 1994 and (iii) 100% of the servicing advisor fees for AFCT
1994. In exchange for the rights contributed and sold to it by Mr. Elder,
ACP (i) distributed a 50% limited partner interest in ACP to Mr. Elder and
(ii) paid Mr. Elder an aggregate of $163,719 in cash. Mr. Brazy contributed

62
<PAGE>

to ACP his right to receive 74.88% of the servicing advisor fees for Video
1993, and in exchange for such right, ACP (i) distributed a 34% limited
partner interest in ACP to Mr. Brazy and (ii) paid Mr. Brazy an aggregate
of $97,691 in cash.

Although ACP has agreed to perform TAG's duties as servicing advisor for the
Securitizations, TAG remains obligated under the documents governing the
Securitizations to perform such duties. The Company has acted as servicing
advisor for the Securitizations since February 1995, and during the period
from February 1995 through March 31, 1998, the Company received an aggregate
of approximately $557,000 in servicing advisor fees for the Securitizations.

Incorporation and Exchange Agreement

Pursuant to an Incorporation and Exchange Agreement dated March 11, 1997,
the Company purchased all the assets and assumed all the liabilities of ACP,
in exchange for 20,000,000 shares of the Company's Common Stock. Pursuant to
an agreement among ACP and its partners dated March 10, 1997, the shares of
Common Stock received by ACP pursuant to the Incorporation and Exchange
Agreement were distributed to ACP's partners as follows:

<TABLE>
<CAPTION>
PARTNER PERCENT
------- -------
<S> <C>
TAG.................................................................. 1.00%
David L. Elder....................................................... 44.75%
Arthur P. Brazy, Jr.................................................. 29.75%
FFC.................................................................. 24.50%
</TABLE>

Following the distribution, ACP was dissolved.

Common Stock Subscription Agreement

Pursuant to a Common Stock Subscription Agreement dated March 11, 1997, FFC
purchased from the Company 3,231,000 shares of the Company's Common Stock at a
price of $1.08 per share in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.

Stockholders' Agreement

On March 11, 1997 the Company, Mr. Elder, Mr. Brazy, TAG and FFC (the
"Principal Stockholders") entered into a stockholders' agreement (the
"Stockholders' Agreement") whereby the Principal Stockholders agreed to
certain rights, restrictions and obligations with respect to their securities
of the Company, as provided therein. Among other things, the Stockholders'
Agreement (i) provides the Principal Stockholders with certain standard
registration rights, (ii) provides FFC with a seat on the Company's Board of
Directors so long as certain conditions are satisfied, and (iii) limits the
ability of FFC to solicit employees, officers and directors of the Company for
employment, as well as the ability of Messrs. Brazy and Elder to solicit
employees, officers and directors of the Company or Koch for employment for as
long as each such Principal Stockholder holds an equity interest in the
Company and for a period of one year thereafter.

Loan Originations

During the period from the Company's incorporation in March 1997 to December
31, 1997, for an administrative convenience, TAG originated approximately $12
million of loans which were transferred concurrently with their origination to
the Company. TAG no longer originates any loans for the Company.

63
<PAGE>

LOAN TO ATHERTON FRANCHISE CAPITAL, L.P.

On February 14, 1995, ACP made an unsecured loan of $310,581 bearing
interest at 10% per annum to Atherton Franchise Capital, L.P., a limited
partnership controlled by Mr. Elder. The note was paid in full in 1997.

RELATIONSHIP WITH NET CAPITAL INCORPORATED

In February 1998, Messrs. Elder and Brazy formed Net Capital Incorporated, a
Delaware corporation ("Net Capital") based in San Diego, to engage in the
business of real estate lending. Net Capital is owned by Messrs. Elder and
Brazy, each of whom are also members of its board of directors. Messrs. Elder
and Brazy are not officers of Net Capital, do not provide any substantial
services to Net Capital and have informed the Company that they do not
currently intend to provide any additional services to Net Capital in the
future. If either of Mr. Elder or Mr. Brazy were to decide to provide
additional services to Net Capital, the amount of his time devoted to the
Company's business would be reduced.

The Company currently holds real estate loans for sale, certain of which
were brokered
to the Company by Net Capital. As of March 31, 1998, the Company had accrued
brokerage fees payable to Net Capital of approximately $62,000 in connection
with loans brokered to the Company by Net Capital. Net Capital may in the
future broker real estate loans to the Company, for which it will receive
market compensation. In addition, the Company may sell these loans or other
real estate loans it may originate in the future to Net Capital. Any such
sales would be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.

64
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of the Company's
Common Stock as of June 1, 1998, by (i) each director of the Company, (ii)
each of the Named Executive Officers, (iii) each person known to the Company
to be beneficial owner of more than 5% of the Common Stock and (iv) all
directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------------
BENEFICIALLY PRIOR TO AFTER
NAME (1) OWNED (2) OFFERING (2) OFFERING (3)
- -------- ------------ ------------ ------------
<S> <C> <C> <C>
David L. Elder (4)...................... 9,150,000 39.4%
Arthur P. Brazy, Jr..................... 5,950,000 25.6
Mark H. McGourty........................ -- --
Richard L. Meiklejohn................... -- --
Jeffrey R. Thompson (5)................. 8,131,000 35.0
c/o Koch Industries, Inc.
4111 East 37th Street North
Wichita, KS 67201
Richard A. Doppelt...................... -- --
Franchise Finance Corp. (6)............. 8,131,000 35.0
4111 East 37th Street North
Wichita, KS 67201
All executive officers and directors as
a group (6 persons).................... 23,231,000 100.0%
</TABLE>
- --------
*Less than one percent
(1) Except as set forth herein, the address of the stockholders is c/o
Atherton Capital Incorporated, 1001 Bayhill Drive, Suite 155, San Bruno,
California 94066.
(2) The number and percentage of shares beneficially owned are based on
23,231,000 shares of Common Stock outstanding as of June 1, 1998.
Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. Shares of Common Stock subject to options
that are currently exercisable or exercisable within 60 days of June 1,
1998 are deemed to be outstanding and beneficially owned by the person
holding such options for the purpose of computing the number of shares
beneficially owned and the percentage ownership of such person, but are
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to
this table, and subject to applicable community property laws, such
persons have sole voting and investment power with respect to all shares
of the Company's Common Stock shown as beneficially owned by them.
(3) Certain stockholders have granted the Underwriters an option to purchase
additional shares to cover over-allotments, if any. If such option is
exercised in full, would sell shares and would then hold
shares ( . %); would sell shares and would then hold
shares ( . %); and would sell shares and would then hold
shares ( %).
(4) Includes 8,950,000 shares of Common Stock owned by the Elder Family Trust,
of which Mr. Elder and his wife are the trustees and beneficiaries. Also
includes 200,000 shares of Common Stock owned by TAG, of which Mr. Elder
is the sole stockholder.
(5) Consists of shares of Common Stock owned by FFC, of which Mr. Thompson is
the President.
(6) FFC is a wholly-owned subsidiary of Koch.

65
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summary of certain provisions of the Company's capital stock
describes all material provisions of the Company's Certificate of
Incorporation and Bylaws. This summary, however, does not purport to be
complete and is subject to, and qualified in its entirety by, the Certificate
of Incorporation and Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part and by the
provisions of applicable law. See "Available Information."

As of March 31, 1998, the total amount of authorized capital stock of the
Company was 30,000,000 shares, consisting of 30,000,000 shares of Common
Stock, par value $0.001 per share. Upon the consummation of the Offering, the
Company's authorized capital stock will consist of 30,000,000 shares of Common
Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock,
par value $0.001 per share (the "Preferred Stock"). Upon consummation of this
Offering, shares of Common Stock and no shares of Preferred Stock
will be issued and outstanding.

COMMON STOCK

The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company will be upon payment therefor,
validly issued, fully paid and nonassessable. The holders of outstanding
shares of Common Stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time determine. See "Dividend Policy." The shares of Common
Stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata the assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities. Each outstanding share of Common Stock is entitled to one vote on
all matters submitted to a vote of the stockholders, including election of
directors. There is no cumulative voting in the election of directors.

PREFERRED STOCK

The Company's Certificate of Incorporation provides that the Preferred Stock
may be issued by the Company in one or more series and that the Board of
Directors has the authority, without further action by the stockholders, to
fix the rights, designations, preferences, qualifications and restrictions
thereof, including dividend rights, conversion rights, voting rights, rights
and terms of redemption, liquidation preferences and sinking fund terms, any
or all of which may be greater than the rights of the Common Stock. The
issuance of Preferred Stock could adversely affect the voting power of holders
of Common Stock and the likelihood that such holders would receive dividend
payments and payments upon liquidation. Such issuance could have the effect of
decreasing the market price of the Common Stock. The issuance of Preferred
Stock may also have the effect of delaying, deterring or preventing a change
in control of the Company. The Company has no present plans to issue any
shares of Preferred Stock.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

After this offering, the holders of 23,231,000 shares of Common Stock, or
their transferees, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of an
agreement between the Company and such holders, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other securityholders exercising registration
rights, the holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein; provided, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration. In addition, the
securityholders benefiting from these rights may require the Company,
beginning twenty-four months after the date of this Prospectus, on not more
than two occasions with respect to any initiating securityholder, to file a
registration statement under the Securities Act with respect to such shares,
and the Company is required to effect such registration, subject to certain
conditions

66
<PAGE>

and limitations. Registration of such shares under the Securities Act would
result in such shares becoming fully tradeable and could have an adverse
effect on the market price for the Company's Common Stock.

CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS

General. Certain provisions of the DGCL and the Company's Certificate of
Incorporation and Bylaws could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. These provisions of Delaware law and the Certificate of Incorporation
and Bylaws may also have the effect of discouraging or preventing certain
types of transactions involving an actual or threatened change of control of
the Company (including unsolicited takeover attempts), even though such a
transaction may offer the Company's stockholders the opportunity to sell their
stock at a price above the prevailing market price.

Delaware Takeover Statute. Following consummation of this Offering, the
Company will be subject to the "business combination" provisions of Section
203 of the DGCL. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
the transaction is approved by the board of directors prior to the date the
interested stockholder obtained such status; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" is defined to include, among other
items, mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of a corporations voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.

Certificate of Incorporation and Bylaws. The Company's Certificate of
Incorporation and Bylaws provide that any action required or permitted to be
taken by the stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be taken by a
consent in writing by stockholders. The Company's Certificate of Incorporation
provides that special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer or the President of the Company. The Company's Bylaws also
require advance written notice by a stockholder of a proposal or director
nomination which such stockholder desires to present at an annual meeting of
stockholders. These provisions could have the effect of delaying consideration
of a stockholder proposal until the next annual meeting unless a special
meeting is called by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer or the President of the Company for consideration of
such proposal. A vote of the holders of two-thirds of the Company's
outstanding Common Stock is required to amend certain provisions of the
Amended and Restated Certificate of Incorporation.

The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Certificate of Incorporation. The Company's
Certificate of Incorporation does not include a provision for cumulative
voting in the election of directors. Under cumulative voting, a minority
stockholder holding a sufficient number of shares may be able to ensure the
election of one or more directors. The absence of

67
<PAGE>

cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the Board of Directors and, as a result, may
have the effect of deterring a hostile takeover or delaying or preventing
changes in control or management of the Company.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the DGCL. In addition, the Certificate of
Incorporation and Bylaws provide that the Company shall indemnify directors
and officers of the Company to the fullest extent permitted by Delaware law.
The Company plans to enter into indemnification agreements with its directors
and executive officers which provide such persons indemnification protection
in the event the Certificate of Incorporation is subsequently amended. See
"Management -- Limitation on Liability and Indemnification Matters."

TRANSFER AGENT AND REGISTRAR

Prior to the Offering, the Company intends to appoint a transfer agent and
registrar for the Company's Common Stock.

LISTING

Application has been made to have the Common Stock accepted for quotation on
the Nasdaq National Market under the symbol "ATHR."

68
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common Stock
of the Company. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.

Upon consummation of this Offering, the Company will have shares
of Common Stock outstanding (based on shares outstanding at March 31, 1998 and
assuming no exercise of outstanding options or the Underwriters' over-
allotment option). Of these shares, the shares of Common Stock
( shares if the Underwriters' over-allotment option is exercised in
full) sold in the Offering will be freely tradeable without restriction or
further registration under the Securities Act, unless held by an "affiliate"
of the Company as defined in Rule 144 under the Securities Act. The remaining
23,231,000 shares of Common Stock held by existing stockholders are
"restricted securities" as defined in Rule 144. Restricted Securities may not
be sold in the public market in the absence of registration under the
Securities Act or pursuant to an exemption from registration, including the
exemption provided by Rule 144 under the Securities Act.

In general, under Rule 144, a person who has beneficially owned restricted
shares for at least one year can sell, in any three-month period, that number
of shares that does not exceed the greater of (i) one percent of the issuer's
then-outstanding shares of Common Stock (approximately shares
immediately after the Offering) or (ii) the average weekly trading volume
during the four calendar weeks immediately preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
issuer. In addition, pursuant to Rule 144(k), a person who is not deemed an
"affiliate" at any time during the three months preceding a sale, and who has
beneficially owned his or her shares for at least two years, can sell such
shares under Rule 144(k) without regard to the limitations described above.

Subject to lock-up agreements, no shares will be eligible for sale as of the
date of this Prospectus and 23,231,000 shares will be eligible for sale,
subject to certain restrictions pursuant to Rule 144, beginning 180 days after
the date of this Prospectus.

As of March 31, 1998, options to purchase 1,614,987 shares of Common Stock
were outstanding, none of which were then exercisable. The Company intends to
file a Form S-8 registration statement under the Securities Act within 90 days
after the date of this Prospectus to register 2,323,100 shares of Common Stock
reserved for issuance under the Company's 1997 Stock plan and shares of
Common Stock reserved for issuance under the Company's Employee Stock Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing. See "Management --
1997 Stock Plan" and "-- Employee Stock Purchase Plan."

After this Offering, the holders of 23,231,000 shares of Common Stock are
entitled to certain registration rights with respect to such shares. If such
registration rights are exercised, the shares can be sold without sales volume
limitations. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's
Common Stock. See "Description of Capital Stock -- Registration Rights of
Certain Holders."

Notwithstanding the foregoing, in connection with this Offering, the
Company, and each of the Company's directors, executive officers and other
stockholders have agreed that they will not sell any Common Stock without the
prior consent of Piper Jaffray Inc. for a period of 180 days after the date of
this Prospectus. See "Underwriting."

69
<PAGE>

UNDERWRITING

The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters named below (the "Underwriters"), for whom Piper Jaffray
Inc. and PaineWebber Incorporated are acting as representatives (the
"Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to the Underwriters, and
each of the Underwriters have severally agreed to purchase, the number of
shares of Common Stock set forth opposite each Underwriter's name in the table
below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Piper Jaffray Inc..................................................
PaineWebber Incorporated...........................................
---
Total............................................................
===
</TABLE>

Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement, if any is purchased (excluding shares
covered by the over-allotment option granted therein). In the event of a
default by any Underwriter, the Purchase Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or decreased or, in certain instances, the Purchase Agreement may be
terminated.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the Price to
Public set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession of not in excess of $ per share.
Additionally, the Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
Offering, the initial public offering price and the other selling terms may be
changed by the Underwriters.

The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable by the Representatives within 30 days after the date of
the Purchase Agreement, to purchase up to an additional shares of Common
Stock at the same price per share to be paid by the Underwriters for the other
shares offered hereby. If the Underwriters purchase any of such additional
shares pursuant to this option, each Underwriter will be committed to purchase
such additional shares in approximately the same proportion as set forth in
the table above. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
distribution of the Common Stock offered hereby.

At the request of the Company, the Underwriters have reserved up to
shares of Common Stock to be issued by the Company and offered hereby for
sale, at the initial public offering price, to directors, officers, employees,
business associates and related persons of the Company. The number of shares
of Common Stock available for sale to the general public will be reduced to
the extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.

70
<PAGE>

In connection with this Offering, the Company, each of the Company's
directors, executive officers and all other stockholders have agreed that they
will not sell any Common Stock without the prior consent of Piper Jaffray Inc.
for a period of 180 days after the date of this Prospectus.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.

Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations between the Company, the Selling
Stockholders and the Representatives. Among the factors to be considered in
determining the initial public offering price will be the Company's record of
operations, the Company's current financial position and future prospects, the
experience of its management, the economics of the franchise finance industry
in general, the general condition of the equity securities markets, sales,
earnings and certain other financial and operating information of the Company
in recent periods, the price-earnings ratios, price-sales ratios, market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
initial public offering price range set forth on the cover page of this
Preliminary Prospectus is subject to change as a result of market conditions
and other factors. See "Risk Factors--No Prior Public Market; Possible
Volatility of Stock Price."

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

71
<PAGE>

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with this Offering will be passed upon for the Underwriters by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California.

EXPERTS

The financial statements of Atherton Capital Incorporated (formerly Atherton
Capital Partners, L.P.) as of December 31, 1997 and 1996, and for each of the
years then ended and for the period from February 10, 1995 (inception) through
December 31, 1995, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
and the rules and regulations promulgated thereunder, with respect to the
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document that is filed as an exhibit to the Registration Statement are not
necessarily complete and each such statement is qualified in all respects by
reference to the full text of such contract or document. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and the exhibits and schedules
thereto, which may be inspected and copied at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained at prescribed rates from the Commissions Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. Upon approval of the Common Stock for
quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information also can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.

Upon completion of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the regional
offices, public reference facilities and Web site of the Commission referred
to above.

72
<PAGE>

ATHERTON CAPITAL INCORPORATED

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Partners' Capital/Stockholders' Equity....................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Condensed Balance Sheets................................................... F-20
Condensed Statements of Operations......................................... F-21
Condensed Statements of Cash Flows......................................... F-22
Notes to Condensed Financial Statements.................................... F-23
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Atherton Capital Incorporated:

We have audited the accompanying balance sheets of Atherton Capital
Incorporated (the Corporation), formerly Atherton Capital Partners, L.P., as
of December 31, 1997 and 1996, and the related statements of operations,
partners' capital/stockholders' equity, and cash flows for the years ended
December 31, 1997 and December 31, 1996 and for the period from February 10,
1995 (inception) through December 31, 1995. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atherton Capital
Incorporated as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and
December 31, 1996 and for the period from February 10, 1995 (inception)
through December 31, 1995 in conformity with generally accepted accounting
principles.

San Francisco, California
February 13, 1998

F-2
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 762 $ 1,620
Accounts receivable and accrued interest.................... 1,272 672
Loans held for sale (note 4)................................ 166,592 98,633
Construction loans (note 4)................................. 1,098 --
Loans held for investment (note 4).......................... 1,284 --
Capitalized servicing rights (note 5)....................... 879 143
Retained interest in loan securitizations (note 6).......... 3,950 --
Furniture, fixtures, and equipment, net of accumulated
depreciation of $152,151 in 1997 and $74,774 in 1996....... 354 155
Note receivable from affiliated company (note 10)........... -- 149
Organization costs, net of accumulated amortization of
$113,510 in 1997 and $49,834 in 1996....................... 205 269
Prepaid expenses and other assets........................... 478 21
-------- --------
Total assets............................................ $176,874 $101,662
======== ========
LIABILITIES, PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 1,448 $ 470
Accrued interest payable.................................... 1,004 555
Warehouse line (note 7)..................................... 160,231 94,542
Subordinated debt facility (note 8)......................... 4,182 4,716
Deferred income tax payable (note 14)....................... 2,202 --
-------- --------
Total liabilities....................................... 169,067 100,283
-------- --------
Minority interest........................................... -- 87
-------- --------
Partners' capital (note 2).................................. -- 1,292
Stockholders' equity (note 2):
Common stock, $.001 par value; 30,000,000 shares
authorized, 23,231,000 shares issued and outstanding at
December 31, 1997; none at December 31, 1996.............. 23 --
Additional paid-in capital................................. 6,746 --
Deferred compensation (note 13)............................ (1,847) --
Retained earnings.......................................... 2,885 --
-------- --------
Total partners' capital/stockholders' equity............ 7,807 1,292
-------- --------
Commitments and contingencies
Total liabilities, partners' capital/stockholders'
equity................................................. $176,874 $101,662
======== ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND FOR THE
PERIOD FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(DOLLARS IN THOUSANDS EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Gain on sale of loans.................. $ 6,833 $ -- $ --
Interest income........................ 8,808 3,925 111
Interest expense....................... 6,616 3,060 56
---------- ------- -------
Net interest income................. 2,192 865 55
Provision for loan losses............... (200) -- --
Loan servicing income................... 291 179 52
Processing fee income................... 17 392 --
Other income............................ 177 -- 12
---------- ------- -------
Total revenues...................... 9,310 1,436 119
---------- ------- -------
Expenses:
Salaries and benefits.................. 2,091 875 740
Professional fees...................... 514 299 454
Travel and entertainment............... 320 196 109
Premises and equipment................. 472 289 108
Amortization........................... 62 50 4
Marketing.............................. 179 213 39
Other administrative................... 447 188 92
---------- ------- -------
Total expenses...................... 4,085 2,110 1,546
---------- ------- -------
Net income (loss) before taxes and
minority interest.................. 5,225 (674) (1,427)
Income tax expense...................... (2,339) -- --
---------- ------- -------
Income (loss) before minority
interest........................... 2,886 (674) (1,427)
Minority interest...................... -- 585 --
---------- ------- -------
Net income (loss)................... $ 2,886 $(1,259) $(1,427)
========== ======= =======
Net income per share -- basic........... $ .13
==========
Weighted average shares outstanding --
basic................................. 22,611,356
==========
Net income per share -- diluted......... $ .12
==========
Weighted average shares outstanding --
diluted............................... 24,226,343
==========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

STATEMENTS OF PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND FOR THE
PERIOD FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
PARTNERS'
ADDITIONAL DEFERRED CAPITAL/
PARTNERS' COMMON PAID-IN COMPEN- RETAINED STOCKHOLDERS'
CAPITAL STOCK CAPITAL SATION EARNINGS EQUITY
--------- ----------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Contributed capital on
February 10, 1995...... $ 3,000 $ -- $ -- $ -- $ -- $ 3,000
Additional contributed
capital............... 74 -- -- -- -- 74
Equity placement fee... (150) -- -- -- -- (150)
Net loss............... (1,427) -- -- -- -- (1,427)
------- ----------- ------ ------- ------ -------
BALANCES AT DECEMBER 31,
1995................... 1,497 -- -- -- -- 1,497
Additional contributed
capital............... 1,054 -- -- -- -- 1,054
Net loss............... (1,259) -- -- -- -- (1,259)
------- ----------- ------ ------- ------ -------
BALANCES AT DECEMBER 31,
1996................... 1,292 -- -- -- -- 1,292
Additional contributed
capital............... 7 -- -- -- -- 7
Liquidation of Atherton
Capital Partners,
L.P................... (1,299) -- -- -- -- (1,299)
Net proceeds from
issuance of 20,000,000
shares of common
stock................. -- 20,000,000 1,279 -- -- 1,299
Net proceeds from
issuance of 3,231,000
shares of common
stock................. -- 3,231,000 3,497 -- -- 3,000
Deferred compensation
with respect to stock
options............... -- -- 1,970 (1,970) -- --
Amortization of
deferred compensation. -- -- -- 123 -- 123
Net income............. -- -- -- 2,885 2,885
------- ----------- ------ ------- ------ -------
BALANCE AT DECEMBER 31,
1997................... $ -- $23,231,000 $6,746 $(1,847) $2,885 $ 7,807
======= =========== ====== ======= ====== =======
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND FOR THE
PERIOD FROM FEBRUARY 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 2,885 $ (1,259) $(1,427)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation.......................... 88 54 21
Amortization and impairment........... 199 90 78
Amortization of deferred compensation. 123 -- --
Provision for loan losses............. 200 -- --
Increase in accounts receivable and
accrued interest..................... (600) (673) --
Loans originated or purchased for
sale................................. (171,266) (101,111) --
Increase in construction loans........ (1,098) -- --
Proceeds from sale of loans........... 104,109 -- --
Gain on sale of loans................. (6,833) -- --
Principal payments received on loans.. 5,328 1,593 --
Increase in capitalized servicing
rights............................... (872) -- --
Increase in retained interest in loan
securitizations...................... (3,950) -- --
(Decrease) increase in deferred loan
fees................................. (782) 885 --
Decrease (increase) in due from
affiliates........................... -- 217 (225)
Increase in organization costs........ -- (318) --
Decrease (increase) in prepaid
expenses and other assets............ (458) 26 (48)
Increase in warehouse credit line..... 65,689 94,542 --
Increase in accounts payable and
accrued liabilities.................. 978 327 144
Increase in deferred tax liability.... 2,203 -- --
Increase in accrued interest payable.. 449 554 --
Minority interest in net income....... -- 585 --
--------- --------- -------
Net cash used in operating
activities......................... (3,608) (4,487) (1,457)
--------- --------- -------
Cash flows from investing activities:
Purchase of servicing rights........... -- -- 261
Purchase of furniture, fixtures, and
equipment............................. (292) (61) 161
Retirement of furniture, fixtures, and
equipment............................. 6 -- --
Decrease (increase) note receivable
from affiliated company.............. 151 162 (311)
--------- --------- -------
Net cash (used in) provided by
investing activities............... (135) 101 (733)
--------- --------- -------
Cash flows from financing activities:
Payment of placement fee............... -- -- (150)
(Decrease) increase in subordinated
debt.................................. (535) 4,716 --
Payments to minority interest.......... (87) (498) --
Contribution of limited partners....... 7 1,034 3,042
Contribution of general partner........ -- 21 32
Additional paid-in capital............. 3,500 -- --
--------- --------- -------
Net cash provided by financing
activities......................... 2,885 5,273 2,923
--------- --------- -------
Net (decrease) increase in cash..... (858) 887 733
--------- --------- -------
Cash at the beginning of the period..... 1,620 733 --
--------- --------- -------
Cash at the ending of the period........ $ 762 $ 1,620 $ 733
========= ========= =======
Supplemental disclosure of cash flow
information:
Cash paid for interest................. $ 6,167 $ 2,505 $ 57
========= ========= =======
Cash paid for income taxes............. $ 425 $ 3 $ --
========= ========= =======
Supplemental schedule of noncash
investing activities:
Transfer of loans held for sale to
loans held for investment............. $ 1,497 $ -- $ --
========= ========= =======
Transfer of net assets from general
partner............................... $ -- $ -- $ 8
========= ========= =======
</TABLE>
See accompanying notes to financial statements.

F-6
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

(1) NATURE OF BUSINESS

Atherton Capital Incorporated (the "Corporation"), formerly Atherton Capital
Partners, L.P. (the "Partnership" or ("ACP"), was incorporated as a Delaware
corporation on March 10, 1997. The Corporation is a specialty commercial
finance company engaged in raising capital for the expansion, capital
improvement, and debt refinancing needs of franchisees of major national and
regional franchisors. During 1997, the Corporation's national lending program
was based in its corporate headquarters in San Bruno and was supported by
regional locations throughout the United States.

The Corporation enters into loan agreements with eligible franchisees to
provide financing pursuant to established underwriting guidelines. The
Corporation may sell loans to other financial institutions, or package a
portfolio of the loans as collateral for securities that are subsequently sold
to investors.

In addition to its lending activities, the Corporation generates fee income
by providing servicing advisory functions to loan pools securitized by the
Corporation or its affiliated entities. An independent servicer is retained to
perform loan collection and other administrative services.

(2) BASIS OF PRESENTATION

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.

The accompanying balance sheet as of December 31, 1996 is that of the
Partnership, the Corporation's predecessor. The statement of operations data
for the years ended December 31, 1997 and 1996, and for the period from
February 10, 1995 (the inception date) to December 31, 1995, are the financial
statements of the Corporation and the Partnership. The consolidated financial
statements of the Partnership include the financial statements of the
Partnership and its 60% owned subsidiary AK LLC. All significant intercompany
balances have been eliminated.

Certain reclassifications to the 1996 and 1995 financial statements have
been made to conform to the 1997 presentation.

(3) SIGNIFICANT ACCOUNTING POLICIES

Formation of the Corporation

On January 8, 1997, ACP acquired the remaining 40% interest in its
subsidiary AK LLC. At the time of the transfer in ownership, all assets and
liabilities of AK LLC were consolidated into the Partnership. On March 10,
1997, the Partnership was liquidated and the Corporation was formed. The
formation of the Corporation was accounted for as a pooling of interest,
whereby all assets and liabilities of the Partnership on the date of
liquidation were sold to the Corporation at historical cost in exchange for
all of the issued stock of the Corporation. Twenty million shares of common
stock were issued to the partners of ACP for their partnership interests.

F-7
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

On March 11, 1997, the Corporation issued an additional 3,231,000 shares of
common stock in exchange for cash to an existing shareholder.

On October 29, 1997, the Company effected a 1,000-for-1 stock split. All
share amounts have been restated to reflect the 1,000-for-1 stock split.

Loans

The Corporation makes loans to qualified franchisees of major national and
regional franchises. In addition to loans originated for sale, the Corporation
may, on occasion, purchase loans made to qualified franchisees. Loans held for
sale are stated at the lower of cost or market value as determined by
indicators of value obtained by management from independent third parties or
current investor yield requirements. Cost is calculated based on the current
principal balance outstanding net of deferred loan origination fees and
premiums or discounts on purchased loans. Loan origination fees, net of
certain direct costs related to the origination of the loans, are deferred and
recognized as a component of the gain or loss on sale when the related loans
are sold. Premiums or discounts on purchased loans are deferred and recognized
as a component of the gain or loss on sale when the related loans are sold.

Construction loans are stated at the principal balance outstanding net of
deferred loan fees. Loan fees, net of certain direct costs related to the
origination of the loans, are deferred and amortized over the estimated life
of the loan using the interest method.

Loans held for investment are stated at the principal balance outstanding
net of deferred loan fees and allowances for loan losses. Loan fees, net of
certain direct costs related to the origination of the loans, are deferred and
amortized over the contractual life of the loan using the interest method. In
the event that a loan is considered impaired, a valuation allowance is
established to the extent that the recorded investment in the loan exceeds the
estimated fair value of the collateral including accrued interest, net
deferred loan fees, and selling costs. Interest income is recognized on
impaired loans in a manner similar to that of all loans.

The Corporation's commitments to originate loans are agreements to lend a
designated amount at a future date in the event that there are no violations
of any of several credit or other established conditions prior to the
origination date. Commitments generally have fixed expiration dates or other
termination clauses and require payment of a fee. Interest rates are not set
until the date of funding, therefore there is no exposure to interest rate
risk during the commitment period. Commitments may expire without being drawn
upon, therefore the total commitment amount does not necessarily represent
future cash requirements. Commitment fees received are recorded as a liability
of the Corporation during the commitment period. Commitment fees on funded
loans are amortized over the life of the loan using the effective interest
method. Fees on expired commitments are recognized as income on expiration.

Servicing Rights

The Corporation owns servicing rights originally purchased by the
Partnership from certain of its limited partners. Such rights relate to a
portion of the cash flows designated as servicing advisory fees arising out of
securitization transactions consummated by affiliates. The limited partners
and the general partner contributed servicing rights in exchange for their
respective interests in the Partnership. The ownership interests received by
the limited partners and the general partner represented the estimated fair
value of the cash flows from those servicing rights.

F-8
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Servicing rights related to securitized loans securitizations are
capitalized. The servicing rights are carried at the lower of estimated fair
value of the cash flows from those rights at the date of securitization or the
current estimated fair value of the remaining cash flow. Servicing rights are
amortized in proportion to and over the period of expected servicing income or
loss.

Retained Interest in Loan Securitizations

The Corporation originates and purchases loans with the primary intent of
reselling them to investors as asset-backed securities through securitization.
Securitizations are accounted for under SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS 125
requires that the selling entity continue to carry retained interests,
including servicing assets, relating to assets sold. Transfers not meeting the
criteria for sale recognition are accounted for as a secured borrowing with a
pledge of collateral. SFAS 125 requires an entity to recognize its obligation
to service financial assets that are retained in a transfer of assets in the
form of a servicing asset or liability. The servicing asset or liability is
amortized in proportion to, and over the period of, net servicing income or
loss. Servicing assets and liabilities are assessed for impairment based on
their fair value.

During 1997, the Corporation sold one portfolio of loans through a
securitization structured as follows: the portfolio of loans was sold,
servicing retained, to a special purpose entity ("SPE") in exchange for stock.
The SPE was established for the limited purpose of buying and reselling the
Corporation's loans. The SPE then transferred the loans to a limited liability
company (the "LLC") in exchange for membership interest in the LLC. The LLC
pledged the loans to a trust (the "Trust"), and in turn issued interest
bearing asset-backed securities (the "Certificates") secured by the Trust.
Several investors purchased the Certificates, with the proceeds from the sale
of the Certificates used by the LLC and the SPE to pay dividends to the
Corporation.

Upon sale of the Certificates, the LLC provided the investors a credit
enhancement consisting of (i) an overcollateralization amount and (ii) a
certificate insurance policy. The overcollateralization amount reflects the
excess of the principal balance of the loans pledged by the LLC to the Trust
over the principal balance of the Certificates sold to the investors.

At the close of the securitization, the Corporation removed from its balance
sheet the loans held for sale and added to its balance sheet (i) the cash
received, (ii) the estimated fair value of the retained interest in the loans
sold consisting of the overcollateralization amount, and (iii) the retained
servicing rights. The Corporation's ownership interest in the
overcollateralization is in the form of equity interests in the SPE and the
LLC. The excess of the cash received and assets retained by the Corporation
over the carrying value of the loans sold, less transaction costs, equals the
net gain on sale of loans recorded by the Corporation.

The Corporation allocated its basis in the loans between the portion of the
loans sold through the Certificates and the portion retained based on the
relative fair values of those portions on the date of sale. The Corporation is
not aware of an active market for the purchase or sale of retained interests,
accordingly management estimates fair value of the retained interest by
discounting the expected cashflows to be received from the
overcollateralization and the retained servicing rights using discount rates
commensurate with the risks involved. The Corporation utilized an effective
annual discount rate of 12% to value the cash flows to be released to the
Company from the Trusts (cash out method) on its retained interest in loans
sold and the servicing rights capitalized during 1997.

F-9
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

similar transactions and the specific characteristics of the loans originated
and purchased by the Corporation. In 1997, the Corporation used a prepayment
rate of 5% for years two through thirteen of the term of the securitization,
and a loss rate of 50 basis points over the initial eight years of the term
with a 50% recovery on a 24 month lag. In subsequent periods the Corporation
may recognize gains or losses attributable to the change in estimated fair
value of the retained interest in loans sold, which are accounted for as
"held-for-trading" securities.

The Corporation receives servicing advisory fees for its participation in
the servicing of the loans. In addition, the Corporation is entitled to the
cash flows from the overcollateralization represented by the collections on
the loans in excess of the amounts required to pay the Certificate principal
and interest, the servicing fees, and certain other fees such as trustee fees,
custodial fees and credit enhancement insurance policy premiums. At the end of
each collateral period, the aggregate cash collections from the loans are
allocated first to the servicing fees and certain other fees such as trustee
fees, custodial fees and credit enhancement insurance policy premiums, and
then to the certificateholders for interest at the pass-through rate on the
certificates plus principal as defined in the Securitization Agreements. If
the cash collected during the period exceeds the amount necessary for the
above allocations, the excess is released to the Corporation.

Retained interests in loans sold generate interest income, net of interest
expense and amortization of premiums and discounts. Income is recognized by
the Corporation to the extent of its ownership interest in the related
earnings or losses of the SPE and the LLC. Income generated from the retained
interest in loans sold is recognized as interest income.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are carried at cost, less accumulated
depreciation. The Corporation depreciates its computer equipment using the
straight-line method over an estimated useful life of three years. Furniture
and fixtures are depreciated using the straight-line method over an estimated
useful life of five years.

Organization Costs

Organization costs reflect costs incurred to establish the legal structure
of the entity and set in place certain operating agreements. The asset is
amortized using the straight-line method over a five year period.

Interest Rate Swap Agreements

Interest rate swap agreements, known as derivative financial instruments,
are used to hedge the effects of interest rate fluctuations. Interest rate
swap agreements are used to convert the interest yield on the loans from a
fixed rate to a variable rate, with the term of each swap agreement matched to
the maturity of the underlying loans. The differential to be paid or received
is recognized as an adjustment to interest income as interest rates change.
The entity is an end-user of derivative financial instruments and does not
conduct trading activities for derivatives.

Servicing Income

Servicing income is earned on the cash flow streams purchased from and
contributed by the certain limited partners and from servicing rights
capitalized in conjunction with the sale of loans. Servicing fees are
recognized as income when received.

F-10
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Provision for Income Taxes

Prior to March 10, 1997, the Corporation's predecessor was organized as a
limited partnership. Accordingly, income and loss was allocated to the
partners and taxed directly to the partners for federal income and state
franchise tax purposes. The Corporation's predecessor converted to a C
corporation on March 10, 1997.

Income taxes for the Corporation are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

Stock Option Plan

On October 17, 1997, the Corporation granted stock options and adopted
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123). In compliance with SFAS 123 the Corporation has
elected to apply the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related
interpretations, and provide pro forma net income disclosures for employee
stock option grants made in 1997 and future years as if the fair-value-based
method defined in SFAS 123 had been applied. Under APB 25, compensation
expense was recorded on the date of grant because the current market price of
the underlying stock exceeded the exercise price.

Earnings Per Share

At December 31, 1997, the Corporation adopted SFAS No. 128, "Earnings Per
Share" (SFAS 128). Under SFAS 128, basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted from issuance of common stock that
they shared in earnings.

(4) LOANS

The Corporation makes loans to qualified franchisees of major national and
regional franchises. Major industry segments in the loan portfolio include
quick service restaurants, and casual and family dining establishments.

Loans held for sale consist of the following at December 31, 1997 and 1996
(in thousands):

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Loans held for sale....................................... $166,681 $99,518
Premium on purchased loans................................ 730 --
Net deferred fees......................................... (819) (885)
-------- -------
Net loans held for sale................................... $166,592 $98,633
======== =======
</TABLE>

F-11
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1997, the Corporation had construction loans of $1,126,000,
with deferred fees of $28,000. There were no construction loans at December
31, 1996. Construction loans provide borrowers temporary funds to finance
specific development projects. Upon completion of the project, the
construction loan is generally replaced by permanent financing.

At December 31, 1997, the Corporation had loans held for investment of
$1,284,000. The amount reflects the outstanding balance of three loans, net of
deferred loan fees and the allowance for loan losses for one borrower in
default. Based on management's estimates of fair value of the underlying
collateral, a valuation allowance of $200,000 was established during 1997.
There were no loans held for investment at December 31, 1996.

The Corporation manages interest rate risk during the period that loans held
for sale and loans held for investment are maintained in the warehouse through
interest rate swap agreements. Under the Corporation's interest rate swap
agreements, a variable rate is received and the Corporation pays a fixed rate
reflecting the note rate on the loans held in the warehouse. Swap agreements
are made in notional principal amounts and maturities matching each franchise
loan at the time that the loan is funded.

At December 31, 1997, the Corporation had conditional commitments to
originate loans of $10,000,000 and to disburse additional funds on existing
development loans of $2,119,000.

(5) SERVICING RIGHTS

For the years ended December 31, 1997 and 1996 the servicing rights account
had the following activity (in thousands):

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Purchased servicing rights....................................... $144 $183
Retained servicing rights........................................ 872 --
Amortization..................................................... (118) (40)
Impairment....................................................... (19) --
---- ----
$879 $143
==== ====
</TABLE>

Amortization and impairment of $137,000 was incurred by the Corporation in
1997, and $40,000 was incurred by the Partnership in 1996.

(6) RETAINED INTEREST IN LOAN SECURITIZATIONS

For the year ended December 31, 1997, retained interest in loans sold had
the following activity (in thousands):

<TABLE>
<S> <C>
Balance at January 1, 1997.......................................... $ --
Overcollateralization recorded in connection with securitization.... 3,667
Interest income from retained interest in loans sold................ 394
Amortization of premiums and discounts on retained interest in loans
sold............................................................... 292
Distributions from SPE to the Corporation........................... (403)
------
$3,950
======
</TABLE>

F-12
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(7) WAREHOUSE LINE OF CREDIT

As of December 31, 1997 and 1996, the Corporation had a warehouse line of
credit with a related party in the amount of $250,000,000 and $125,000,000,
respectively. Availability of the warehouse credit line is subject to adequate
collateralization in the form of loans. The stated maturity date on the
warehouse line of credit is December 31, 1999 with an option to extend, at the
sole discretion of the lender for up to one year. The line of credit bears
interest at LIBOR plus 2.00% to 3.50% per annum and is used to fund 95% to
100% of loan balances at the time of origination. At December 31, 1997, loans
in the amount of $168,682,000 were pledged against advances of $160,231,000
bearing interest at a weighted average rate of 7.65% per annum. At December
31, 1996, loans held for sale in the amount of $99,518,000 were pledged
against advances of $94,542,000 bearing interest at 7.5% per annum. The
portion of the credit line utilized to fund any loan is payable upon sale or
securitization of such loan.

(8) SUBORDINATED DEBT

The Corporation has a subordinated revolving line of credit in the amount of
$20,000,000, provided by the same related party that provides the warehouse
line of credit, available to fund, among other things, the remaining balance
of each loan origination. The stated maturity date on the subordinated debt is
December 31, 1999, with an option to extend, at the sole discretion of the
lender for up to one year. The outstanding balance at December 31, 1997 and
1996 was $4,182,000 and $4,716,000, respectively. The outstanding amounts
under the subordinated revolving line of credit bears interest at LIBOR plus
7.50% per annum.

(9) INTEREST INCOME

The Corporation generates interest income from loans and from the retained
interest in loans sold. Interest income had the following activity:

<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest from loans.................. $8,923 $4,206 $ --
Interest from swap settlement........ (927) (380) --
Interest from retained interest in
loan securitizations 394 -- --
Amortization of premiums and
discounts on retained interest in
loan securitizations................ 292 -- --
Other interest income................ 125 100 111
------ ------ -----
Total interest income............... $8,807 $3,925 $ 111
====== ====== =====
</TABLE>

(10) RELATED PARTY TRANSACTIONS

The Corporation receives servicing fee income related to servicing retained
in the sale of loans through securitization. The fee is paid by Atherton
Franchisee Loan Funding 1997-A LLC, a special purpose entity owned by the
Corporation and other related entities. Servicing fees of $180,000 were
received during the year ended December 31, 1997.

Approximately $12 million of loans originated from March 11, 1997 through
December 31, 1997 in California were originated by The Atherton Group
Incorporated and were transferred to the Corporation concurrently with the
origination.

F-13
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Corporation has entered into a Tax Sharing Agreement with Orinda
Management Company, a wholly-owned special purpose entity, under which the
Corporation is required to file a consolidated Federal income tax return, and
may be required or permitted to file a consolidated or combined state income
tax return.

An unsecured note receivable due from a related party in the amount of
$148,000, earning interest at 10%, was paid in full during 1997.

(11)FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS No. 107), requires the disclosure of the
fair value of financial instruments, for which it is practicable to estimate
the value.

Although management uses its best judgment in assessing fair value, there
are inherent weaknesses in any estimate that may be reflected in the fair
values disclosed. The fair value estimates are made at a discrete point in
time based on readily available market information when applicable. However,
for a significant portion of the Corporation's financial instruments, active
markets do not exist. Estimates of fair value of instruments without quoted
market prices are subjective in nature and involve various assumptions
regarding estimated timing and amount of cash flows, risk characteristics, and
interest rate, among other things. Assumptions and estimates are a matter of
judgment and changes in the assumptions used could significantly affect the
fair values disclosed. Fair values have not been adjusted to reflect changes
in market conditions for the period subsequent to the valuation dates of
December 31, 1997 and 1996, and therefore estimates presented may not be
indicative of amounts which could be realized in a current transaction.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

Cash, Accounts Receivable and Accrued Interest, Note Receivable Affiliated
Company, Accounts Payable and Accrued Liabilities, and Accrued Interest
Payable

The carrying amount approximates the fair value due to the short-term nature
of these instruments.

Loans Held for Sale

The fair value is determined by discounting the expected cash flows using
estimated investor required yield rates for similar financial instruments.

Loans Held for Investment

The fair value of performing loans is determined by discounting the
contractual cash flows using the current interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. Nonperforming loans are valued based on the estimated
value of the underlying collateral, net of the estimated selling costs.

Construction Loans

The fair value is determined by discounting the contractual cash flows using
the current interest rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.

F-14
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Retained Interest in Loan Securitizations

The Corporation is not aware of an active market for the purchase or sale of
retained interests, accordingly management estimates fair value of the
retained interest by discounting the expected cashflows to be received from
the overcollateralization using discount rates commensurate with the risks
involved. The Corporation utilized an effective annual discount rate of 12% to
value the cash flows to be released to the Company from the Trusts (cash out
method) on its retained interest in loans sold and the servicing rights
capitalized during 1997.

The Corporation must also estimate the future rates of prepayments,
delinquencies, defaults, and default loss severity as they impact the amount
and timing of the estimated cash flows. The Corporation estimates prepayments
by evaluating historical prepayment performance of similar loan product and
the impact of trends in the industry. The Corporation estimates defaults and
default losses using available historical loss data for similar transactions
and the specific characteristics of the loans originated and purchased by the
Corporation. In 1997, the Corporation used a prepayment rate of 5% for years
two through 13 of the term of the securitization, and a loss rate of 50 basis
points over the initial eight years of the term with a 50% recovery on a 24
month lag.

Servicing Rights

The fair value of capitalized servicing rights is determined as the present
value of expected future cash flows, discounted at a current market rate.

Commitments to Extend Credit

The Corporation's commitments to extend credit generally have fixed
expiration dates or other termination clauses. Interest rates are not set
until the date of funding, therefore there is no exposure to interest rate
risk during the commitment period. The estimated fair value approximates the
recorded deferred fee amount and is excluded from the table.

Warehouse Line of Credit

The carrying amount is believed to approximate the fair value of the
warehouse line of credit due to the similarity of the terms of the debt with
terms currently offered by lenders, and the variability of the interest rate
based on current market rates.

Subordinated Debt

The carrying amount is believed to approximate the fair value of the
subordinated debt due to the similarity of the terms of the debt with terms
currently offered by lenders, and the variability of the interest rate based
on current market rates.

F-15
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Derivative Financial Instruments

The fair value of interest rate swap agreements generally reflects the
estimated amounts that the Corporation would receive or pay, based upon dealer
quotes, to terminate such agreements at the reporting date.

The following table presents the carrying amounts and estimated fair value
of the Corporation's financial instruments at December 31, 1997 and 1996 (in
thousands).

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash.................................. $ 762 $ 762 $ 1,620 $ 1,620
Accounts receivable and accrued
interest............................. 1,272 1,272 672 672
Due from affiliates................... -- -- -- --
Loans held for sale, net.............. 166,592 188,983 98,633 107,930
Construction loans, net............... 1,098 1,098 -- --
Investment loans, net................. 1,284 1,284 -- --
Retained interest in loan
securitizations...................... 3,950 3,950 -- --
Capitalized servicing rights.......... 879 879 143 135
Note receivable -- affiliate.......... -- -- 148 148
Liabilities:
Accounts payable and accrued
liabilities.......................... 1,448 1,448 470 470
Accrued interest payable.............. 1,004 1,004 555 555
Warehouse line of credit.............. 160,231 160,231 94,542 94,542
Subordinated debt..................... 4,182 4,182 4,716 4,716
Off-balance sheet:
Interest rate swaps................... -- (5,908) -- 237
</TABLE>

(12)LEASES

Future minimum rental payments required under operating leases, including
the Corporation's office facilities, that have initial or remaining
noncancellable terms in excess of one year at December 31, 1997 are as follows
(in thousands):

<TABLE>
<S> <C>
1998.................................................................. $ 297
1999.................................................................. 277
2000.................................................................. 313
2001.................................................................. 337
2002.................................................................. 339
Thereafter............................................................ 344
------
Total................................................................ $1,907
======
</TABLE>

Rent expense of $270,000 was incurred by the Corporation in 1997, and rent
expense of $139,000 and $57,000 was incurred by the Partnership in 1996 and
1995, respectively.

F-16
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(13)STOCK COMPENSATION PLAN

In October 1997, the Board of Directors of the Corporation approved the
Atherton Capital Incorporated 1997 Stock Plan (the "1997 Plan") authorizing
the grant of options to purchase Common Stock. Concurrently with the approval
of the 1997 Plan, the Corporation adopted SFAS No. 123, Accounting for Stock
Based Compensation, which permits a company to account for stock options
granted under either the fair-value-based or intrinsic-value-based (as
described in Accounting Principles Bulletin Opinion No. 25) method. However,
if the Corporation elects to account for options granted under the intrinsic-
value-based method, it must make certain disclosures with respect thereto. The
Corporation has elected to account for stock options granted under the
intrinsic-value-based method of accounting. Accordingly, compensation expense
in connection with the grant of the options described above is based on the
difference between the fair market value of the shares on the grant date and
the exercise price, and is amortized over the vesting period, which begins in
the year of grant and continues for a period of four years. In October 1997,
the Corporation granted options to purchase an aggregate of 1,614,987 shares
of Common Stock at $1.43 per share. Management determined that the fair value
of the common stock on the date of option grant was $2.65 per share. As a
result, the Company recorded deferred compensation of $1,970,284 which will be
amortized over four years. Unamortized compensation expense was $1,847,141 at
December 31, 1997. Had the Corporation determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Corporation's net income for the year ended December 31, 1997 would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net income:
As reported.................................................... $2,885,095
Pro forma...................................................... $2,855,872
Earnings per share--basic
As reported.................................................... $ 0.13
Pro forma...................................................... $ 0.13
Earnings per share--diluted
As reported.................................................... $ 0.12
Pro forma...................................................... $ 0.12
</TABLE>

Under the 1997 Plan, the maximum number of shares of Common Stock subject to
option or sale is 2,323,100 shares. The exercise price of all incentive stock
options granted under the 1997 Stock Plan as determined by the Administrator
must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and stock
purchase rights ("SPRs") granted under the 1997 Stock Plan is in most cases
determined by the Administrator. With respect to any participant who owns
stock representing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive or
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive or nonstatutory stock
option must not exceed five years. The term of all other options granted under
the 1997 Stock Plan may not exceed ten years.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997: No dividends are paid for all years; expected volatility is
0%; the risk free interest rate is 6.0%; and the expected life is 10 years.

F-17
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the Corporation's fixed stock options as of
December 31, 1997 and changes during the year ended is presented below:

<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Granted at October 17,
1997................... 1,614,987 $1.43
Exercised............... -- --
Forfeited............... -- --
---------- -----
Outstanding at year-end.. 1,614,987 $1.43
========== =====
Options exercisable at
year-end................ --
Remaining contractual
life.................... 9.83 years
Fair value of each option
granted during the year. $ 1.86
</TABLE>

(14)INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 11, 1997
(INCORPORATION) TO
DECEMBER 31, 1997
-------------------
<S> <C>
Current:
Federal................................................ $ 66
State.................................................. 19
------
85
------
Deferred:
Federal................................................ 1,614
State.................................................. 650
------
2,265
------
$2,349
======
</TABLE>

A reconciliation of the statutory income tax rate to the effective income
tax rate of the Corporation is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Income tax at federal statutory rate............................ 34.00%
State franchise tax, net of federal benefit..................... 8.14
Unrecognized benefit -- predecessor deferred.................... 1.00
Nondeductible permanent differences............................. 0.11
Other........................................................... 1.53
-----
44.78%
=====
</TABLE>

Deferred income taxes reflect the tax effect of temporary differences
existing between the financial statement basis and tax basis of the
Corporation's assets and liabilities. Deferred tax benefits attributable to
temporary differences are recognized to the extent that realization of such
benefits is more likely than not.

F-18
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The tax effect of the principal temporary items creating the Corporation's
deferred income tax liability are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Book allowance for loan loss in excess of tax................... $ 82
Book amortization in excess of tax.............................. 16
Book deferred compensation in excess of tax..................... 46
Net operating loss carryforward................................. 386
Other book deductions in excess of tax.......................... 9
------
Deferred tax asset............................................ 539
------
Book gain on sale of loans not taxable.......................... 2,311
Tax discount accretion on loans held for sale................... 408
Tax depreciation in excess of book.............................. 22
------
Deferred tax liability........................................ 2,741
------
Net deferred tax liability.................................... $2,202
======
</TABLE>

The Corporation believes a valuation allowance is not needed to reduce the
gross deferred tax asset as it is more likely than not that that gross
deferred tax assets will be recovered through the reversal of existing taxable
temporary differences and other sources of future taxable income.

(15)EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the year ended December 31 1997
(dollars in thousands except per share amounts).

<TABLE>
<CAPTION>
WEIGHTED
INCOME AVERAGE SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Net income............................. $ 2,885
-------
Basic earnings per share -- net income
available to common stockholders...... $ 2,885 22,611,356 $0.13
=====
Effect of dilutive securities:
Options................................ 1,614,987
----------
Diluted earnings per share -- net
income available to common
stockholders plus assumed conversions. $ 2,885 24,226,343 $0.12
======= ========== =====
</TABLE>

F-19
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Cash.................................................... $ 608 $ 762
Loans held for sale..................................... 255,871 166,592
Construction loans...................................... 3,227 1,098
Loans held for investment............................... 917 1,284
Retained interest in loan securitizations............... 4,086 3,950
Accrued interest receivable............................. 1,748 1,254
Other assets............................................ 2,094 1,934
-------- --------
Total assets........................................ $268,551 $176,874
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line of credit................................ $247,620 $160,231
Subordinated debt facility.............................. 8,478 4,182
Deferred income taxes................................... 1,937 2,202
Other liabilities....................................... 3,046 2,452
-------- --------
Total liabilities................................... 261,081 169,067
-------- --------
Stockholders' equity
Common stock, $.001 par value; 30,000,000 shares
authorized, 23,231,000 shares issued and outstanding.. 23 23
Additional paid-in capital............................. 6,746 6,746
Deferred compensation.................................. (1,724) (1,847)
Retained earnings...................................... 2,425 2,885
-------- --------
Total stockholders' equity.......................... 7,470 7,807
-------- --------
Commitments and contingencies........................... -- --
-------- --------
Total liabilities and stockholders' equity.......... $268,551 $176,874
======== ========
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-20
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Gain on sale of loans................................ $ -- $ 6,833
Interest income...................................... 4,609 1,906
Interest expense..................................... 3,841 1,546
---------- ----------
Net interest income............................... 768 360
---------- ----------
Servicing fee income................................. 43 60
Processing fee income................................ 1 8
Other income......................................... 16 1
---------- ----------
Total revenues.................................... 828 7,262
---------- ----------
Expenses:
Salaries and benefits................................ 598 242
Provision for loan losses............................ 300 --
General and administrative........................... 655 362
---------- ----------
Total expenses...................................... 1,553 604
Net income (loss) before taxes...................... (725) 6,658
Income tax expense (benefit)......................... (265) 2,861
---------- ----------
Net income(loss).................................. $ (460) $ 3,797
========== ==========
Net income (loss) per share -- basic.................. $ (0.02) $ 0.18
========== ==========
Weighted average shares outstanding -- basic.......... 23,231,000 20,718,000
========== ==========
Net income (loss) per share -- diluted................ $ (0.02) $ 0.17
========== ==========
Weighted average shares outstanding -- diluted........ 24,845,987 22,332,987
========== ==========
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-21
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND MARCH 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (460) $ 3,797
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation....................................... 36 16
Amortization and impairment........................ 54 41
Amortization of deferred compensation.............. 123 --
Provision for loan losses.......................... 300 --
(Increase) decrease in accounts receivable and
accrued interest.................................. (553) 574
Loans originated or purchased for sale............. (90,991) (22,559)
Increase in construction loans..................... (2,129) --
Decrease in loans held for investment.............. 67 --
Proceeds from sale of loans........................ -- 104,109
Gain on sale of loans.............................. -- (6,833)
Principal payments received on loans............... 1,752 1,165
Increase in capitalized servicing rights........... (137) (872)
Increase in retained interest in loan
securitizations................................... -- (3,700)
Decrease in deferred loan fees..................... (39) (738)
Increase in prepaid expenses and other assets...... (139) (4)
Increase (decrease) in warehouse credit line....... 87,388 (72,092)
Increase (decrease) in accounts payable and accrued
liabilities....................................... 38 (19)
(Decrease) increase in deferred tax liability...... (265) 2,858
Increase in accrued interest payable............... 555 (555)
-------- --------
Net cash (used in) provided by operating
activities....................................... (4,400) 5,188
-------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures, and equipment...... (51) (11)
Notes receivable from an affiliate.................. -- 34
-------- --------
Net cash (used in) provided by investing
activities....................................... (51) 23
-------- --------
Cash flows from financing activities:
Increase in subordinated debt....................... 4,297 (4,425)
Payment to minority interest........................ -- (87)
Partner contributions............................... -- 7
Additional paid-in capital.......................... -- 3,500
-------- --------
Net cash provided by (used in) financing
activities....................................... 4,297 (1,006)
-------- --------
Net decrease in cash.............................. (154) 4,204
-------- --------
Cash at the beginning of the period.................. 762 1,620
-------- --------
Cash at the ending of the period..................... $ 608 $ 5,824
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 3,286 $ 1,999
======== ========
Cash paid for income taxes.......................... -- --
======== ========
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-22
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the financial statements and footnotes thereto for the year ended December
31, 1997 included elsewhere herein.

The accompanying balance sheets as of March 31, 1998 and December 31, 1997
and the statements of operations and cash flows for the period ended March
31,1998 are those of the Corporation. The statement of operations and cash
flows for the period ended March 31, 1997 are derived from the financial
statements of the Corporation and Atherton Capital Partners, L.P. ("ACP"), the
Corporation's predecessor. The consolidated financial statements of ACP
include the financial statements of ACP and its 60% owned subsidiary AK LLC.
All significant intercompany balances were eliminated.

Certain reclassifications to the 1997 financial statements have been made to
conform to the 1998 presentation.

Recent accounting developments -- In June 1997, the FASB issued SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
adopted SFAS 130 on January 1, 1998. The adoption of SFAS 130 had no impact on
the Company's financial position, results of operations or disclosures.

In June 1997, FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report In June 1997,
FASB issued SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
will result in disclosure changes only. Management is in the process of
identifying its operating segments and intends to make the required
disclosures for operating segments in its 1998 annual financial statements.

In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employer's Disclosures about Pension and Other
Postretirement Benefits." SFAS 132 amends the disclosure requirements of SFAS
No. 87, "Employers' Accounting for Pensions, SFAS No.88, "Employer's
Benefits," and SFAS 106, "Employer's Accounting for Retirement Benefits Other
than Pensions." SFAS 132 standardizes the disclosure requirements of SFAS Nos.
87 and 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other retirement benefits. SFAS 132
is effective for fiscal years beginning after December 15, 1997. SFAS 132 will
result in disclosure changes only.

F-23
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

(2) LOANS

Loans held for sale consist of the following at March 31, 1998 and December
31, 1997 (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Loans held for sale.................................. $255,921 $166,681
Premium on purchased loans........................... 730 730
Deferred loan fees................................... (780) (819)
-------- --------
Net loans held for sale.............................. $255,871 $166,592
======== ========
</TABLE>

The Corporation had construction loans of $3,265,000 at March 31, 1998, and
$1,126,000 at December 31, 1997 and with deferred fees of $38,000 and $28,000,
respectively. Construction loans provide borrowers temporary funds draw
periodically through the commitment period in order to provide funding for a
specific project. Upon completion of the project, the construction loan is
replaced by permanent financing.

At March 31, 1998 and December 31, 1997, the Corporation had loans held for
investment of $917,000 and $1,284,000, respectively. The amount reflects the
outstanding balance of three loans, net of deferred loan fees and allowance
for loan losses, related to one borrower. At March 31, 1998, $1,054,000 in
principal balance was 30 days delinquent. Based on management's estimates of
fair value of the underlying collateral, the valuation allowance was increased
from $200,000 at December 31, 1997 to $500,000 at March 31, 1998 through an
additional charge to the provision for loan losses of $300,000.

(3) RETAINED INTEREST IN LOANS SOLD

During 1997, the Corporation sold one portfolio of loans through a
securitization structured as follows: the portfolio of loans was sold,
servicing retained, to a special purpose entity ("SPE") in exchange for stock.
The SPE was established for the limited purpose of buying and reselling the
Corporation's loans. The SPE then transferred the loans to a limited liability
company (the "LLC") in exchange for membership interest in the LLC. The SPE
and the LLC are non-consolidated wholly owned subsidiaries of the Corporation.
These subsidiaries are separate legal entities. The assets owned by the
subsidiaries are not available to the creditors of the Corporation. The LLC
pledged the loans to a trust (the "Trust"), and in turn issued interest
bearing asset-backed securities (the "Certificates") secured by the Trust.
Several investors purchased the Certificates, with the proceeds from the sale
of the Certificates used by the LLC and the SPE to pay dividends to the
Corporation.

F-24
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

Upon sales of the Certificates, the LLC provided the investors a credit
enhancement consisting of (i) an overcollateralization amount, and (ii) a
certificate insurance policy. The overcollateralization amount reflects the
excess of the principal balance of the loans pledged by the LLC to the Trust
over the principal balance of the Certificates sold to the investors.

At the close of the securitization, the Corporation removed from its balance
sheet the loans held for sale and added to its balance sheet (i) the cash
received, (ii) the estimated fair value of the retained interest in the loans
sold consisting of the overcollateralization amount, and (iii) the retained
servicing rights. The Corporation's ownership interest in the
overcollateralization is in the form of equity interests in the SPE and LLC.
The excess of the cash received and assets retained by the Corporation over
the carrying value of the loans sold, less transaction costs, equals the net
gain on sale of loans recorded by the Corporation.

The Corporation allocated its basis in the loans between the portion of the
loans sold through the Certificates and the portion retained based on the
relative fair values of those portions on the date of sale. The Corporation is
not aware of an active market for the purchase or sale of retained interests,
accordingly management estimates fair value of the retained interest by
discounting the expected cashflows to be received from the
overcollateralization and the retained servicing rights using discount rates
commensurate with the risks involved. In discounting anticipated cash flows to
be released to the Corporation from the SPE (cash outmethod), the Corporation
utilized an effective annual discount rate of 12% to value the retained
interest in loans sold and the servicing rights capitalized during 1997.

The Corporation must also estimate the future rates of prepayments,
delinquencies, defaults, and default loss severity as they impact the amount
and timing of the estimated cash flows. The Corporation estimates prepayments
by evaluating historical prepayment performance of similar loan product and
the impact of trends in the industry. The Corporation estimates defaults and
default losses using available historical loss data for similar transactions
and the specific characteristics of the loans originated and purchased by the
Corporation. In 1997, the Corporation used a prepayment rate of 5% for years
two through thirteen of the term of the securitization, and a loss rate of 50
basis points over the initial eight years of the term with a 50% recovery on a
24 month lag. In subsequent periods the Corporation may recognize gains or
losses attributable to the change in estimated fair value of the retained
interest in loans sold, which are accounted for as "held-for-trading"
securities.

The Corporation receives servicing advisory fees for its participation in
the servicing of the loans. In addition, the Corporation is entitled to the
cash flows from the overcollateralization represented by the collections on
the loans in excess of the amounts required to pay the Certificate principal
and interest, the servicing fees, and certain other fees such as trustee fees,
custodial fees and credit enhancement insurance policy premiums. At the end of
each collateral period, the aggregate cash collections from the loans are
allocated first to the servicing fees and certain other fees such as trustee
fees, custodial fees and credit enhancement insurance policy premiums, and
then to the certificateholders for interest at the pass-through rate on the
certificates plus principal as defined in the securitization agreements. If
the cash collected during the period exceeds the amount necessary for the
above allocations, the excess is released to the Corporation.

Retained interests in loans sold generate interest income, net of interest
expense and amortization of premiums and discounts. Income is recognized by
the Corporation to the extent of its ownership interest in the related
earnings or losses of the SPE and LLC. Income generated from the retained
interest in loans sold is recognized as interest income.

F-25
<PAGE>

ATHERTON CAPITAL INCORPORATED
(A DELAWARE CORPORATION)

(UNAUDITED)

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

(4) INTEREST INCOME

The Corporation generates interest income from loans and the retained
interest in loans sold. For the period ended March 31, 1998 and 1997, interest
income had the following activity (in thousands):

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Interest from loans..................................... $4,845 $2,050
Interest from swap settlement........................... (465) (208)
Interest from retained interest in loans sold........... 142 4
Amortization of premiums and discounts on retained
interest in loans sold................................. 85 30
Other interest income................................... 2 33
------ ------
$4,609 $1,906
====== ======
</TABLE>

(5) WAREHOUSE LINE OF CREDIT

At March 31, 1998 and December 31, 1997, the Corporation had a warehouse
line of credit with a related party in the amount of $300,000,000 and
$250,000,000, respectively. Availability of the warehouse credit line is
subject to adequate collateralization in the form of franchise loans. The
stated maturity date of the warehouse credit line is December 31, 1999 with an
option to extend, at the sole discretion of the lender, for up to one year.
The line of credit bears interest at LIBOR plus 2.00% to 3.50% per annum and
is used to fund 95% to 100% of the principal loan balance at the time of
origination. At March 31, 1998, loans in the amount of $260,670,000 were
pledged against advances of $247,620,000 bearing interest at a weighted
average rate of 7.8% per annum. At December 31, 1997, loans in the amount of
$168,682,000 were pledged against advances of $160,231,000 bearing interest at
a weighted average rate of 7.5% per annum. The portion of the credit line
utilized to fund any loan is payable upon sale or securitization of such loan.

(6) SUBORDINATED DEBT

At March 31, 1998 and December 31, 1997, the Corporation has unsecured
subordinated debt in the amount of $20,000,000 provided by the same related
party that provides the warehouse line of credit available to fund, among
other things, the remaining balance of each loan origination. The stated
maturity on the subordinated debt is December 31, 1999, with an option to
extend, at the sole discretion of the lender, for up to one year. The
outstanding balance at March 31, 1998 and December 31, 1997 was $8,478,000 and
$4,182,000, respectively. The subordinated debt bears interest at LIBOR plus
7.50% per annum.

F-26
<PAGE>

No dealer, salesperson or any other person has been authorized to give any
information or to make any representation not made by this Prospectus, and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company, the Selling Stockholders or the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby by anyone
in any jurisdiction, where such an offer or solicitation is not authorized, or
in which the person making such offer or solicitation is not qualified to make
such offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company or that information
continued herein is correct as of any time subsequent to the date of this
Prospectus.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
The Company............................................................... 23
Use of Proceeds........................................................... 24
Dividend Policy........................................................... 24
Capitalization............................................................ 25
Dilution.................................................................. 26
Selected Financial Data................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Franchising Industry Overview............................................. 38
Business.................................................................. 41
Management................................................................ 55
Certain Transactions...................................................... 62
Principal Stockholders.................................................... 65
Description of Capital Stock.............................................. 66
Shares Eligible for Future Sale........................................... 69
Underwriting.............................................................. 70
Legal Matters............................................................. 72
Experts................................................................... 72
Additional Information.................................................... 72
Index to Financial Statements............................................. F-1
</TABLE>

----------------

Until , 1998 (25 days after the commencement of this offering), all
dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

ATHERTON CAPITAL INCORPORATED

[LOGO]

Common Stock

----------------
PROSPECTUS
----------------

Piper Jaffray Inc.

PaineWebber Incorporated

, 1998

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.

<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee............... $17,700
NASD filing fee................................................... 6,500
Nasdaq National Market listing fee................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Blue Sky fees and expenses........................................ *
Transfer agent fees............................................... *
Miscellaneous..................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees
and individuals against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person
being or having been a director, officer, employee or agent to the Registrant.
The Delaware General Corporation Law provides that Section 145 is not
exclusive of other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. Section 6.1 of the Registrants Bylaws provides for
indemnification by the Registrant of its directors, officers and employees to
the fullest extent permitted by the Delaware General Corporation Law.

Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions, or (iv) for any transaction from which the
director derived an improper personal benefit. The Registrants Certificate of
Incorporation provides for such limitation of liability.

The Registrant has obtained directors and officers, insurance providing
indemnification for certain of the Registrant's directors, officers and
employees for certain liabilities.

Reference is also made to the Underwriting Agreement to be filed as Exhibit
1.1 to the Registration Statement for information concerning the Underwriter's
obligation to indemnify the Registrant and its officers and directors in
certain circumstances.

II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In January 1997, in connection with the formation of the Registrant, the
Registrant issued an aggregate of 20,000,000 shares of Common Stock to The
Atherton Group Incorporated, David L. Elder, Arthur P. Brazy, Jr. and
Franchise Finance Corp. in exchange for their respective partnership interests
in Atherton Capital Partners, L.P., the predecessor of the Registrant. The
shares of Common Stock were issued in a private placement in reliance on
Section 4(2) of the Securities Act. In March 1997, the Registrant issued
3,231,000 shares of Common Stock to Franchise Finance Corp. at a purchase
price of $0.92 per share. The shares of Common Stock were issued in a private
placement in reliance on Section 4(2) of the Securities Act. In October 1997,
the Registrant issued options to purchase 1,614,987 shares of Common Stock to
11 current employees of the Company at an exercise price of $1.43 per share.
The options were issued in a private placement in reliance on Section 4(2) of
the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1(a) Certificate of Incorporation of the Registrant, as amended.
3.1(b) Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(a) Bylaws of the Registrant.
3.2(b) Form of Amended and Restated Bylaws of the Registrant.
4.1* Form of Registrant's Common Stock certificate.
4.2* Stockholders' Agreement dated March 11, 1997 by and among David L.
Elder, Arthur P. Brazy, Jr., The Atherton Group Incorporated,
Franchise Finance Corp. and the Registrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding the legality of the securities being issued.
10.1* Form of 1997 Stock Plan and related agreements.
10.2* Form of 1998 Employee Stock Purchase Plan.
10.3(a)* Warehouse Credit Agreement dated January 8, 1997 between Atherton
Capital Partners, L.P. and Franchise Finance Corp.
10.3(b)* First Amendment to the Warehouse Credit Agreement dated November 14,
1997 between Franchise Finance Corp. and the Registrant.
10.3(c)* Second Amendment to the Warehouse Credit Agreement dated April 1998
between Franchise Finance Corp. and the Registrant.
10.4* Subordinated Credit Agreement dated January 8, 1997 between Atherton
Capital Partners, L.P. and Franchise Finance Corp.
11.1* Statement of computation of net income per share.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.

(b) Financial Statement Schedules

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.

II-2
<PAGE>

ITEM 17. UNDERTAKINGS

(a) The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed
to be the initial bona fide Offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF SAN BRUNO, STATE OF CALIFORNIA, ON THIS 2ND DAY OF JUNE, 1998.

Atherton Capital Incorporated

/s/ David L. Elder
By___________________________________
DAVID L. ELDER
CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints David L.
Elder and Arthur P. Brazy, Jr., and each of them, as attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendment to this Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting to
said attorneys-in-fact, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

SIGNATURES TITLE DATE

/s/ David L. Elder Chief Executive June 2, 1998
- ------------------------------------- Officer and
DAVID L. ELDER Director (Principal
Executive Officer)

/s/ Arthur P. Brazy, Jr. President and June 2, 1998
- ------------------------------------- Director
ARTHUR P. BRAZY, JR.

/s/ Mark H. McGourty Senior Vice June 2, 1998
- ------------------------------------- President and Chief
MARK H. MCGOURTY Financial Officer
(Principal
Financial and
Accounting Officer)

/s/ Jeffrey R. Thompson Director June 2, 1998
- -------------------------------------
JEFFREY R. THOMPSON

/s/ Richard A. Doppelt Director June 2, 1998
- -------------------------------------
RICHARD A. DOPPELT

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1(a) Certificate of Incorporation of the Registrant, as
amended.
3.1(b) Form of Amended and Restated Certificate of
Incorporation of the Registrant.
3.2(a) Bylaws of the Registrant.
3.2(b) Form of Amended and Restated Bylaws of the Registrant.
4.1* Form of Registrant's Common Stock certificate.
4.2* Stockholders' Agreement dated March 11, 1997 by and
among David L. Elder, Arthur P. Brazy, Jr., The Atherton
Group Incorporated, Franchise Finance Corp. and the
Registrant.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, regarding the legality of the
securities being issued.
10.1* Form of 1997 Stock Plan and related agreements.
10.2* Form of 1998 Employee Stock Purchase Plan.
10.3(a)* Warehouse Credit Agreement dated January 8, 1997 between
Atherton Capital Partners, L.P. and Franchise Finance
Corp.
10.3(b)* First Amendment to the Warehouse Credit Agreement dated
November 14, 1997 between Franchise Finance Corp. and
the Registrant.
10.3(c)* Second Amendment to the Warehouse Credit Agreement dated
April 1998 between Franchise Finance Corp. and the
Registrant.
10.4* Subordinated Credit Agreement dated January 8, 1997
between Atherton Capital Partners, L.P. and Franchise
Finance Corp.
11.1* Statement of computation of net income per share.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.

<PAGE>
EXHIBIT 3.1(A)

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ATHERTON CAPITAL INCORPORATED

A DELAWARE CORPORATION

Atherton Capital Incorporated, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the or
this "CORPORATION"), does hereby certify as follows:

1. The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on March 10, 1997.

2. Article Four of the Certificate of Incorporation of this Corporation is
hereby amended in its entirety to read as follows:

"The total number of shares of all classes of stock which the Corporation
shall have authority to issue is thirty million (30,000,000), all of which shall
be common stock, $0.001 par value per share ("Common Stock"). All shares of
Common Stock will be identical and shall entitle the holders thereof to the same
rights and privileges.

Upon filing of this Certificate of Amendment of Certificate of
Incorporation, there shall be a one thousand-for-one stock split pursuant to
which each outstanding share of Common Stock is converted into one thousand
(1,000) shares of Common Stock."

3. The foregoing amendment of Certificate of Incorporation has been duly
approved and adopted by the Board of Directors of the Corporation in accordance
with Section 242 of the Delaware General Corporation Law.

<PAGE>
4. The foregoing amendment of Certificate of Incorporation has been duly
approved by written consent of the stockholders of the Corporation in accordance
with Sections 228 and 242 of the Delaware Corporation Law.

IN WITNESS WHEREOF, Atherton Capital Incorporated has caused this amendment
to the Certificate of Incorporation to be signed by its President this 15th day
of October, 1997.

/s/ David R. Elder
-----------------------------------------
David Elder, President

-2-
<PAGE>

CERTIFICATE OF INCORPORATION

ATHERTON CAPITAL INCORPORATED

FIRST: The name of the corporation is ATHERTON CAPITAL INCORPORATED (the
"Corporation").

SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.

FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is thirty-thousand (30,000), all of
which shall be common stock, $0.001 par value per share ("Common Stock"). All
shares of Common Stock will be identical and shall entitle the holders thereof
to the same rights and privileges.

FIFTH: In furtherance and not in limitation of the powers conferred by
law, the Board of Directors shall have the power to make, alter, amend and
repeal the by-laws (except so far as the by-laws adopted by the stockholders
shall otherwise provide). Any by-laws made by the Board of Directors under the
powers conferred hereby may be altered, amended or repealed by the Board of
Directors or by the stockholders.

SIXTH: Meetings of stockholders may be held within or without the State of
Delaware as the by-laws may provide. The books of the Corporation may be kept,
subject to any provision contained in applicable law, outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the Corporation. Elections of directors
need not be by written ballot unless a by-law of the Corporation shall so
provide.
<PAGE>

SEVENTH: To the fullest extent permitted by the General Corporation Law of
the State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any repeal or modification of this ARTICLE SEVENTH by the
stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation with respect to any act or omission occurring prior to the time of
such repeal or modification.

EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred on stockholders herein are granted
subject to this reservation.

NINTH: The Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts in connection with
such action, suit or proceeding, in accordance with the laws of the State of
Delaware, and to the full extent permitted by said laws, except as the by-laws
of the Corporation may otherwise provide. Such indemnification shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, including insurance purchased and maintained by the
Corporation, and shall continue as to a person who has ceased to be a director,
officer, employee, agent or affiliate and shall inure to the benefit of the
heirs, executors and administrators of such a person.

TENTH: The name and address of the sole incorporator is as follows:

David L. Elder
1001 Bayhill Drive, Suite 155
San Bruno, CA 94066

THE UNDERSIGNED, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware does make this certificate, hereby declaring and
certifying that
<PAGE>

this is his act and deed and the facts herein stated are true, and accordingly
has hereunto set forth his hand this 10th day of March, 1997.

/s/ David L. Elder
-------------------------
David L. Elder

<PAGE>
EXHIBIT 3.1(B)

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

ATHERTON CAPITAL INCORPORATED

Atherton Capital Incorporated, a corporation organized and existing under
the laws of the State of Delaware, does hereby certify:

1. The name of the corporation is Atherton Capital Incorporated. The
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on March 10, 1997, and a Certificate of Amendment thereof
was filed with the Secretary of State of the State of Delaware on October 29,
1997.

2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's Certificate of
Incorporation as heretofore amended. The amendments and restatement herein set
forth have been duly approved by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of Delaware and by the
written consent of a majority of the stockholders of the corporation and a
majority of the holders of each class entitled to a class vote thereon in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of Delaware.

3. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:

FIRST. The name of the corporation is Atherton Capital Incorporated (the
"Corporation").

SECOND. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.

THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.

FOURTH. The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares that the Corporation is authorized to issue is __________
(____________) shares, consisting of _____________ (___________) shares of
Common Stock, par value $0.01 per share, and Five Million (5,000,000) shares of
Preferred Stock, par value $0.01 per share.

1
<PAGE>

Upon filing of this Amended and Restated Certificate of Incorporation,
there shall be a one-for-______ reverse stock split pursuant to which each
outstanding share of Common Stock is converted into _____ (_____) shares of
Common Stock.

All shares of Common Stock will be identical and shall entitle the holders
thereof to the same rights and privileges. The Preferred Stock may be issued
from time to time in one or more series. The Board of Directors is hereby
authorized to fix or alter from time to time the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof, including without limitation the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), redemption price or prices, and
the liquidation preferences of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series and the designation thereof, or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.

FIFTH. The number of directors which constitute the entire Board of
Directors of the Corporation shall be five (5). At each annual meeting of
stockholders, directors of the Corporation shall be elected to hold office until
the ______ annual meeting next succeeding their election and until their
successors have been duly elected and qualified; except that if any such
election shall not be so held, such election shall take place at a stockholders'
meeting called and held in accordance with the General Corporation Law of
Delaware. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.

Any director may be removed from office by the stockholders of the
Corporation only for cause.

Vacancies occurring on the Board of Directors for any reason and newly
created directorships resulting from an increase in the authorized number of
directors may be filled only by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of the Board
of Directors. A person so elected by the Board of Directors to fill a vacancy
or newly created directorship shall hold office until the next election of
directors and until his or her successor shall have been duly elected and
qualified.

SIXTH. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the Bylaws of the Corporation (except as may be
otherwise provided in the Bylaws), but the stockholders may make additional
Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise.

2
<PAGE>

SEVENTH. Elections of directors need not be by written ballot except and
to the extent provided in the Bylaws of the Corporation.

EIGHTH. A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of
Delaware as the same exists or may hereafter be amended. Any repeal or
modification of this Article EIGHTH shall not adversely affect any right or
protection of a director of the Corporation existing hereunder with respect to
any act or omission occurring prior to such repeal or modification.

NINTH. Stockholders of the Corporation may not take action by written
consent in lieu of a meeting but must take any actions at a duly called annual
or special meeting.

TENTH. Advance notice of stockholder nominations for the election of
directors, and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.

ELEVENTH. Special meetings of the stockholders of the Corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the President or (iii) the Board of Directors.

TWELFTH. Notwithstanding any other provisions of this Amended and
Restated Certificate of Incorporation or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any affirmative
vote of the holders of the capital stock required by law or this Amended and
Restated Certificate of Incorporation, the affirmative vote of the holders of at
least two-thirds (2/3) of the combined voting power of all of the then-
outstanding shares of the Corporation entitled to vote shall be required to
alter, amend or repeal Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH, TENTH,
ELEVENTH and TWELFTH.

THIRTEENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.

4. The foregoing amendment of the Certificate of Incorporation was duly
approved as of _______________ by a vote of the holders of a majority of the
outstanding shares of the Corporation's Common Stock in accordance with Section
242(b) of the Delaware General Corporation Law.

3
<PAGE>

THE UNDERSIGNED, being the Chief Executive Officer of the Corporation, does
make this certificate, hereby declaring and certifying that this is his act and
deed and the facts herein stated are true, and accordingly, has hereunto set his
hand this ________________, 1998.

ATHERTON CAPITAL INCORPORATED

____________________________________________
David L. Elder, Chief Executive Officer

ATTEST:

______________________________
___________, Secretary

<PAGE>
EXHIBIT 3.2(A)

BY-LAWS

ATHERTON CAPITAL INCORPORATED

(A DELAWARE CORPORATION)
<PAGE>

BY-LAWS

ATHERTON CAPITAL INCORPORATED

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - OFFICES........................................................ 1
1.1 REGISTERED OFFICE................................................... 1
1.2 OTHER OFFICES....................................................... 1

ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1
2.1 ANNUAL MEETING...................................................... 1
2.2 SPECIAL MEETINGS.................................................... 1
2.3 PLACE OF MEETINGS................................................... 2
2.4 NOTICE OF MEETINGS.................................................. 2
2.5 STOCKHOLDER LIST.................................................... 2
2.6 QUORUM.............................................................. 2
2.7 PROXIES............................................................. 2
2.8 VOTING.............................................................. 3
2.9 VOTING OF CERTAIN SHARES............................................ 3
2.10 ACTION WITHOUT MEETING............................................. 3
2.11 TREASURY STOCK..................................................... 3

ARTICLE III - DIRECTORS.................................................... 4
3.1 NUMBER AND ELECTION................................................. 4
3.2 RESIGNATIONS AND VACANCIES.......................................... 4
3.3 REMOVAL............................................................. 4
3.4 MANAGEMENT OF AFFAIRS OF CORPORATION................................ 4
3.5 DIVIDENDS AND RESERVES.............................................. 5
3.6 REGULAR MEETINGS.................................................... 5
3.7 SPECIAL MEETINGS.................................................... 5
3.8 NOTICE OF SPECIAL MEETINGS.......................................... 5
3.9 QUORUM.............................................................. 5
3.10 ACTION WITHOUT MEETING............................................. 6
3.11 PRESIDING OFFICER.................................................. 6
3.12 EXECUTIVE COMMITTEE................................................ 6
3.14 OTHER COMMITTEES................................................... 6
3.15 ALTERNATES......................................................... 6
3.16 QUORUM AND MANNER OF ACTING - COMMITTEES........................... 6
3.17 COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC......................... 7
3.18 FEES AND COMPENSATION OF DIRECTORS................................. 7
3.19 RELIANCE UPON RECORDS.............................................. 7
</TABLE>

i
<PAGE>

<TABLE>
<S> <C>
3.20 OTHER AGREEMENTS................................................... 7

ARTICLE IV - NOTICES....................................................... 8
4.1 MANNER OF NOTICE.................................................... 8
4.2 WAIVER OF NOTICE.................................................... 8

ARTICLE V - OFFICERS....................................................... 8
5.1 OFFICERS............................................................ 8
5.2 ELECTION AND TERM OF OFFICE......................................... 8
5.3 REMOVAL AND RESIGNATION............................................. 9
5.4 VACANCIES........................................................... 9
5.5 CHAIRMAN OF THE BOARD............................................... 9
5.6 PRESIDENT........................................................... 9
5.7 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS,
VICE PRESIDENTS.................................................... 9
5.8 SECRETARY........................................................... 9
5.9 CHIEF FINANCIAL OFFICER............................................. 10
5.10 OTHER OFFICERS AND EMPLOYEES....................................... 10
5.11 SALARIES........................................................... 10

ARTICLE VI - EXECUTION OF INSTRUMENTS AND BORROWING........................ 10
6.1 EXECUTION OF INSTRUMENTS............................................ 10
6.2 BANKING ARRANGEMENTS................................................ 11

ARTICLE VII - CERTIFICATES OF STOCK AND THEIR TRANSFER..................... 11
7.1 CERTIFICATES OF STOCK............................................... 11
7.2 LOST, STOLEN OR DESTROYED CERTIFICATES.............................. 11
7.3 TRANSFERS OF STOCK.................................................. 12
7.4 RESTRICTIONS ON TRANSFER............................................ 12
7.5 NO FRACTIONAL SHARE CERTIFICATES.................................... 12
7.6 FIXING RECORD DATE.................................................. 12
7.7 STOCKHOLDERS OF RECORD.............................................. 13

ARTICLE VIII - INDEMNIFICATION............................................. 13
8.1 IN GENERAL.......................................................... 13

ARTICLE IX - AMENDMENTS.................................................... 13
9.1 IN GENERAL.......................................................... 13
</TABLE>

ii
<PAGE>

BY-LAWS

ATHERTON CAPITAL INCORPORATED

ARTICLE I

OFFICES
-------

1.1 REGISTERED OFFICE
-----------------

The initial registered office of the corporation in the State of Delaware
shall be located at 1209 Orange Street, in the City of Wilmington, County of New
Castle, and the name of its registered agent is The Corporation Trust Company.
The registered office and registered agent may be changed from time to time by
resolution of the Board of Directors in the manner prescribed by law.

1.2 OTHER OFFICES
-------------

The corporation may also have offices at such other places both within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS
------------------------

2.1 ANNUAL MEETING
--------------

The annual meeting of the stockholders shall be held at such date, time and
location in each year as determined by the Board of Directors for the purposes
of electing directors and for the transaction of such other business as may come
before the meeting.

If the election of directors shall not be held on the day hereinbefore
designated for the annual meeting, or at any adjournment thereof, the Board of
Directors shall cause such election to be held at a special meeting of
stockholders as soon thereafter as convenient.

2.2 SPECIAL MEETINGS
----------------

Except as otherwise prescribed by statute, special meetings of the
stockholders for any purpose or purposes, may be called and the location thereof
designated by the Chairman of the Board or the President or any Executive Vice
President and shall be called and the location thereof designated by the
Secretary at the request in writing of a majority of the Board of Directors or
of stockholders owning capital stock of the corporation having not less than 20%
of the total voting power. Such request shall state the purpose of the proposed
meeting.
<PAGE>

2.3 PLACE OF MEETINGS
-----------------

Each meeting of the stockholders for the election of directors or for any
other purpose shall be held at such place, either within or without the State of
Delaware, and at such time as shall be determined pursuant to Sections 2.1 and
2.2 and stated in the notice of the meeting or in a duly executed waiver or
notice thereof.

2.4 NOTICE OF MEETINGS
------------------

Written or printed notice stating the place and time of each annual or
special meeting of the stockholders and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten (10) days nor more than sixty (60) days before the date of the meeting.

When a meeting is adjourned to another time or place, no notice of the
adjourned meeting other than an announcement at the meeting need be given unless
the adjournment is for more than thirty (30) days or a new record date is fixed
for the adjourned meeting after such adjournment.

2.5 STOCKHOLDER LIST
----------------

At least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at such meeting, arranged in
alphabetical order, and showing the address of each such stockholder and the
number of shares registered in the name of each such stockholder, shall be
prepared by the Secretary. Such list shall be open to examination of any
stockholder of the corporation during ordinary business hours, for any purpose
germane to the meeting, for a period of at least ten (10) days prior to the
meeting, at the office of the corporation, and the list shall be produced and
kept at the time and place of meeting during the whole time thereof, and subject
to the inspection for any purpose germane to the meeting of any stockholder who
may be present.

2.6 QUORUM
------

The holders of capital stock of the corporation having a majority of the
voting power thereof, present in person or represented by proxy, shall be
requisite for, and shall constitute, a quorum at all meetings of the
stockholders of the corporation for the transaction of business, except as
otherwise provided by statute, the certificate of incorporation or these by-
laws. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat present
in person or represented by proxy shall have power to adjourn the meeting from
time to time until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.

2.7 PROXIES
-------

At every meeting of the stockholders, each stockholder having the right to
vote thereat shall be entitled to vote in person or by proxy. Such proxy shall
be appointed by an instrument in writing subscribed by such stockholder and
bearing a date not more than three (3) years prior to such meeting, unless such
proxy provides for a longer period; and it shall be filed with the Secretary of
the corporation before, or at the time of, the meeting.
<PAGE>

2.8 VOTING
------

Unless the certificate of incorporation provides otherwise, at every
meeting of stockholders, each stockholder shall be entitled to one (1) vote for
each share of stock of the corporation entitled to vote thereat and registered
in the name of such stockholder on the books of the corporation on the pertinent
record date. When a quorum is present at any meeting of the stockholders, the
vote of the holders of a majority of the stock having voting power which is
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which, by provision of the
statutes, the certificate of incorporation or these by-laws, a different vote is
required, in which case such provision shall govern and control the decision of
such question. If the certificate of incorporation provides for more or less
than one (1) vote for any share on any matter, every reference in these by-laws
to a majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock.

2.9 VOTING OF CERTAIN SHARES
------------------------

Shares standing in the name of another corporation, domestic or foreign,
and entitled to vote may be voted by such officer, agent, or proxy as the by-
laws of such corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such corporation may determine. Shares standing in
the name of a deceased person, a minor or an incompetent and entitled to vote
may be voted by his administrator, executor, guardian or conservator, as the
case may be, either in person or by proxy. Shares standing in the name of a
trustee, receiver or pledgee and entitled to vote may be voted by such trustee,
receiver or pledgee either in person or by proxy as provided by Delaware law.

2.10 ACTION WITHOUT MEETING
----------------------

Unless otherwise restricted by the certificate of incorporation or these
by-laws, whenever the vote of stockholders at a meeting thereof is required or
permitted to be taken for or in connection with any corporate action, the
meeting and vote of stockholders may be dispensed with if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented thereto in writing. Such
consent shall be filed with the minutes of proceedings of the stockholders and
shall have the same force and effect as an action taken at a duly called meeting
of the stockholders at which a quorum was present.

2.11 TREASURY STOCK
--------------

Shares of its own stock belonging to the corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held by the corporation, shall not be
voted at any meeting and shall not be counted in determining the total number of
outstanding shares for the purpose of determining whether a quorum is present.
Nothing in this section shall be construed to limit the right of the corporation
to vote shares of its own stock held by it in a fiduciary capacity.
<PAGE>

ARTICLE III

DIRECTORS
---------

3.1 NUMBER AND ELECTION
-------------------

The number of directors which shall constitute the first Board of Directors
shall be three (3). Thereafter the number of directors shall be established
from time to time by resolution of the Board of Directors, subject to the right
of the stockholders to increase or decrease the number of directors of the
corporation.

3.2 RESIGNATIONS AND VACANCIES
--------------------------

Any director may resign at any time by giving written notice to the Board
of Directors or to the President. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective. If, at any other time than the annual
meeting of the stockholders, any vacancy occurs in the Board of Directors caused
by resignation, death, retirement, disqualification or removal from office of
any director or otherwise, or any new directorship is created by an increase in
the authorized number of directors, a majority of the directors then in office,
although less than a quorum, may choose a successor, or fill the newly created
directorship, and the director so chosen shall hold office until the next annual
election of directors by the stockholders and until his successor shall be duly
elected and qualified, unless sooner displaced.

3.3 REMOVAL
-------

Any director may be removed, with or without cause, at any meeting of the
stockholders, by the affirmative vote of the holders of a majority of the stock
of the corporation having voting power, and the vacancy in the Board of
Directors caused by such removal may be filled by the stockholders at such
meeting.

3.4 MANAGEMENT OF AFFAIRS OF CORPORATION
------------------------------------

The property and business of the corporation shall be managed by its Board
of Directors, which may exercise all such powers of the corporation and do all
such lawful acts and things as are not by statute or by the certificate of
incorporation or by these by-laws directed or required to be exercised or done
by stockholders. In case the corporation shall transact any business or enter
into any contract with a director, or with any firm of which one (1) or more of
its directors are members, or with any trust, firm, corporation or association
in which any director is a stockholder, director or officer or otherwise
interested, the officers of the corporation and directors in question shall be
severally under the duty of disclosing all material facts as to their interest
and as to the contract or transaction to the remaining directors promptly if and
when such interested officers or such interested directors in question shall
become advised of the circumstances. In the case of continuing relationships in
the normal course of business such disclosure shall be deemed effective, when
once given, as to all transactions and contracts subsequently entered into.
<PAGE>

3.5 DIVIDENDS AND RESERVES
----------------------

Dividends upon stock of the corporation may be declared by the Board of
Directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property, in shares of stock or otherwise in the form, and to
the extent, permitted by law. The Board of Directors may set apart, out of any
funds of the corporation available for dividends, a reserve or reserves for
working capital or for any other lawful purpose, and also may abolish any such
reserve in the manner in which it was created.

3.6 REGULAR MEETINGS
----------------

An annual meeting of the Board of Directors shall be held, without other
notice than this by-law, immediately after, and at the same place as, the annual
meeting of the stockholders. The Board of Directors may provide, by resolution,
the time and place, either within or without the State of Delaware, for the
holding of additional regular meetings without other notice than such
resolution.

3.7 SPECIAL MEETINGS
----------------

Special meetings of the Board of Directors may be called by the Chairman of
the Board or the President or any Executive Vice President and shall be called
by the Secretary at the request of any director, to be held at such time and
place, either within or without the State of Delaware, as shall be designated by
the call and specified in the notice of such meeting; and notice thereof shall
be given as provided in Section 3.8 of these by-laws.

3.8 NOTICE OF SPECIAL MEETINGS
--------------------------

Except as otherwise prescribed by statute, written or actual oral notice of
the time and place of each special meeting of the Board of Directors shall be
given at least five (5) business days, if sent by mail, or not less than two (2)
business days if sent by facsimile or given by telephone prior to the time of
holding the meeting. Any director may waive notice of any meeting.

3.9 QUORUM
------

At each meeting of the Board of Directors, the presence of not less than a
majority of the whole board shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or these by-laws. If a quorum shall not be present at any meeting of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.

Unless otherwise restricted by the certificate of incorporation, any member
of the Board of Directors or of any committee designated by the Board may
participate in a meeting of the directors or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by means of such equipment shall constitute presence in person at such meeting.
<PAGE>

3.10 ACTION WITHOUT MEETING
----------------------

Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting,
if a written consent thereto is signed by all members of the board or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the board or committee.

3.11 PRESIDING OFFICER
-----------------

The presiding officer at any meeting of the Board of Directors shall be the
Chairman of the Board or the President or, in their absence, any other director
elected chairman by vote of a majority of the directors present at the meeting.

3.12 EXECUTIVE COMMITTEE
-------------------

The Board of Directors may, by resolution passed by a majority of the
number of directors fixed by these by-laws, designate three (3) or more
directors of the corporation to constitute an executive committee, which, to the
extent provided in the resolution and by Delaware law, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation.

3.14 OTHER COMMITTEES
----------------

The Board of Directors may, by resolution passed by a majority of the
number of directors fixed by these by-laws, designate such other committees as
it may from time to time determine. Each such committee shall consist of such
number of directors, shall serve for such term and shall have and may exercise,
during intervals between meetings of the Board of Directors, such duties,
functions and powers as the Board of Directors may from time to time prescribe.

3.15 ALTERNATES
----------

The Board of Directors may from time to time designate from among the
directors alternates to serve on one (1) or more committees as occasion may
require. Whenever a quorum cannot be secured for any meeting of any committee
from among the regular members thereof and designated alternates, the member or
members of such committee present at such meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of such
absent or disqualified member.

3.16 QUORUM AND MANNER OF ACTING - COMMITTEES
----------------------------------------

The presence of a majority of members of any committee shall constitute a
quorum for the transaction of business at any meeting of such committee, and the
act of a majority of those present shall be necessary for the taking of any
action thereat.

3.17 COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC.
-------------------------------------------

The chairman of each committee shall be selected from among the members of
the committee by the Board of Directors.

Each committee shall keep a record of its acts and proceedings, and all
actions of each
<PAGE>

committee shall be reported to the Board of Directors at its next meeting.

Each committee shall fix its own rules of procedure not inconsistent with
these by-laws or the resolution of the Board of Directors designating such
committee and shall meet at such times and places and upon such call or notice
as shall be provided by such rules.

3.18 FEES AND COMPENSATION OF DIRECTORS
----------------------------------

Directors shall not receive any stated salary for their services as such;
but, by resolution of the Board of Directors, a fixed fee, with or without
expenses of attendance, may be allowed for attendance at each regular or special
meeting of the board. Members of the board shall be allowed their reasonable
travelling expenses when actually engaged in the business of the corporation.
Members of any committee may be allowed like fees and expenses for attending
committee meetings. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.

3.19 RELIANCE UPON RECORDS
---------------------

Every director of the corporation, or member of any committee designated by
the Board of Directors pursuant to authority conferred by Section 3.14 of these
by-laws, shall, in the performance of his duties, be fully protected in relying
in good faith upon the books of account or reports made to the corporation by
any of its officials, or by an independent certified public accountant, or by an
appraiser or other expert selected with reasonable care by the Board of
Directors or by such committee, or in relying on good faith upon other records
of the corporation, including, without limiting the generality of the foregoing,
records setting forth or relating to the value and amount of assets, liabilities
and profits of the corporation or any other facts pertinent to the existence and
amount of surplus or other funds which dividends might properly be declared or
paid or with which stock of the corporation might lawfully be purchased or
redeemed.

3.20 OTHER AGREEMENTS
----------------

The provisions of this Article III relating to directors of the corporation
shall be subject to any stockholders' agreement, voting agreement or other
agreement to which the corporation is a party and, to the extent permitted by
law, any provisions of such other agreements that are inconsistent with these
by-laws shall govern.
<PAGE>

ARTICLE IV

NOTICES
-------

4.1 MANNER OF NOTICE
----------------

Whenever under the provisions of the statutes, the certificate of
incorporation or these by-laws notice is required to be given to any
stockholder, director or member of any committee designated by the Board of
Directors, it shall not be construed to require personal delivery and such
notice may be given in writing by depositing it, in a sealed envelope, in the
mails, air mail or first class, postage prepaid, addressed (or by delivering it
to a telegraph company, charges prepaid, for transmission or sending by telecopy
or fax) to such stockholder, director or member either at the address of such
stockholder, director or member as it appears on the books of the corporation
or, in the case of such a director or member, at his business address; and such
notice shall be deemed to be given at the time when it is thus deposited in the
mail (or sent by telecopy, fax or delivered to the telegraph company). Such
requirement for notice shall be deemed satisfied, except in the case of
stockholder meeting with respect to which written notice is mandatorily required
by law, if actual notice is received orally or in writing by the person entitled
thereto as far in advance of the event with respect to which notice is given as
the minimum notice period required by law or these by-laws.

4.2 WAIVER OF NOTICE
----------------

Whenever any notice is required to be given under the provisions of the
statutes, the certificate of incorporation, or these by-laws, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before, at or after the time stated therein, shall be deemed equivalent thereto.
Attendance by a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors or committee of directors need be specified in any
written waiver of notice unless so required by statute, the certificate of
incorporation or these by-laws.

ARTICLE V

OFFICERS
--------

5.1 OFFICERS
--------

The officers of the corporation shall be a President, a Secretary, a Chief
Financial Officer and such other officers as the Board of Directors shall from
time to time determine. Any two (2) or more offices may be held by the same
person. None of the officers need be a director, a stockholder of the
corporation or a resident of the State of Delaware.

5.2 ELECTION AND TERM OF OFFICE
---------------------------

The officers of the corporation shall be elected annually by the Board of
Directors at their first meeting held after each regular annual meeting of the
stockholders. If the election of officers shall not be held at such meeting of
the board, such election shall be held at a regular or special meeting of the
Board of Directors as soon thereafter any may be convenient. Each officer shall
hold office until his successor is elected and qualified or until his death or
resignation or until he shall have been removed in the manner hereinafter
provided.
<PAGE>

5.3 REMOVAL AND RESIGNATION
-----------------------

Any officer may be removed, either with or without cause, by a majority of
the directors then in office at any regular or special meeting of the board; but
such removal shall be without prejudice to the contract rights, if any, of such
person so removed. Any officer may resign at any time by giving written notice
to the Board of Directors, to the President or to the Secretary of the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.

5.4 VACANCIES
---------

A vacancy in any office because of death, resignation, removal, or any
other cause may be filled for the unexpired portion of the term by the Board of
Directors.

5.5 CHAIRMAN OF THE BOARD
---------------------

The Board of Directors may elect one (1) of the directors to be Chairman of
the Board.

5.6 PRESIDENT
---------

5.7 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, VICE PRESIDENTS
------------------------------------------------------------------

The Board of Directors may elect as officers of the corporation one (1) or
more Executive Vice Presidents, one (1) or more Senior Vice Presidents and one
(1) or more Vice Presidents, none of whom need be members of the Board of
Directors. Reference in this by-law to the term "Vice President" shall include
Executive Vice President, Senior Vice President and Vice President unless
otherwise specified. Any Vice President may sign, with the Secretary or an
Assistant Secretary, or the Chief Financial Officer, certificates for shares of
stock of the corporation the issuance of which shall have been duly authorized
by the Board of Directors.

5.8 SECRETARY
---------

The Board of Directors shall appoint a Secretary who shall: (a) keep the
minutes of the meetings of the stockholders, the Board of Directors and
committees of directors, in one (1) or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the provisions of these
by-laws or as required by law; (c) have charge of the corporate records; (d)
keep a register of the post office address of each stockholder, director and
committee member which shall from time to time be furnished to the Secretary by
such stockholder, director or member; (e) sign with the President, or a Vice
President, certificates for shares of stock of the corporation, the issuance of
which shall have been duly authorized by resolution of the Board of Directors;
(f) have general charge of the stock transfer books of the corporation; and (g)
in general, perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to the Secretary by the
President or by the Board of Directors. The Secretary may delegate such details
of the performance of duties of his or her office as may be appropriate in the
exercise of reasonable care to one (1) or more persons in his or her stead, but
shall not thereby be relieved of responsibility for the performance of such
duties.
<PAGE>

5.9 CHIEF FINANCIAL OFFICER
-----------------------

The Board of Directors shall elect a Chief Financial Officer who shall be
the chief financial officer of the corporation. The Chief Financial Officer
shall have the custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors. The Chief Financial Officer shall disburse the funds
of the corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chairman of the
corporation, the President and the Board of Directors, at its regular meetings,
or when the Board of Directors so requires, an account of all the Chief
Financial Officer's transactions as Chief Financial Officer and the financial
condition of the corporation.

5.10 OTHER OFFICERS AND EMPLOYEES
----------------------------

The Board of Directors may appoint such other officers of the corporation
as it deems appropriate.

5.11 SALARIES
--------

No officer shall be prevented from receiving a salary or other compensation
by reason of the fact that he is also a director of the corporation.

ARTICLE VI

EXECUTION OF INSTRUMENTS AND BORROWING
--------------------------------------

6.1 EXECUTION OF INSTRUMENTS
------------------------

(a) Unless otherwise specified herein or by the Board of Directors,
instruments in writing may be signed for and on behalf of the
corporation by any one (1) of the Chairman of the Board, the
President, the Executive Vice President, the Secretary or the Chief
Financial Officer, and all instruments in writing so signed shall be
binding upon the corporation without any further authorization or
formality. The Board of Directors shall have power by resolution, to
appoint the person or persons by whom any instruments in writing
generally or specifically may be signed for and on behalf of the
corporation;

(b) The signature of any person may be engraved, lithographed or otherwise
mechanically reproduced upon such terms and conditions as the Board of
Directors may prescribe and every such facsimile signature shall for
all purposes be deemed to be the signature of the person whose
signature it reproduces and shall be binding upon the corporation.

The term "instruments in writing" as used in this Article includes, without
limitation, contracts, deeds, mortgages, hypothecs, charges, bonds, debentures,
stock certificates or other securities, bills of exchange, conveyances,
transfers, assignments, releases, receipts, discharges, proxies and powers of
attorney.

6.2 BANKING ARRANGEMENTS
--------------------
<PAGE>

The banking business of the corporation including, without limitation, the
borrowing of money and the giving of security therefor, shall be transacted with
such banks, trust companies, or other bodies corporate or organizations as may
from time to time be designated by or under the authority of the Board of
Directors. Such banking business or any part thereof shall be transacted under
such agreements, instruments and delegations of powers as the Board of Directors
may from time to time prescribe or authorize.

ARTICLE VII

CERTIFICATES OF STOCK AND THEIR TRANSFER
----------------------------------------

7.1 CERTIFICATES OF STOCK
---------------------

The certificates of stock of the corporation shall be in such form as may
be determined by the Board of Directors, shall be numbered and shall be entered
in the books of the corporation as they are issued. They shall exhibit the
holder's name and number of shares and shall be signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary or an
Assistant Secretary. If any stock certificate is signed (a) by a transfer agent
or an assistant transfer agent or (b) by a transfer clerk acting on behalf of
the corporation and a registrar, the signature of any officer of the corporation
may be facsimile. In case any such officer whose facsimile signature has thus
been used on any such certificate shall cease to be such officer, whether
because of death, resignation or otherwise, before such certificate has been
delivered by the corporation, such certificate may nevertheless be delivered by
the corporation, as though the person whose facsimile signature has been used
thereon had not ceased to be such officer.

7.2 LOST, STOLEN OR DESTROYED CERTIFICATES
--------------------------------------

The Board of Directors in individual cases, or by general resolution or by
delegation to the transfer agent, may direct a new certificate or certificates
to be issued in place of any certificate or certificates theretofore issued by
the corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate
or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates, or his legal representative, to advertise the
same in such manner as it shall require and/or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.

7.3 TRANSFERS OF STOCK
------------------

Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, and upon payment of applicable
taxes with respect to such transfer, and in compliance with any restrictions on
transfer applicable to the certificate or shares represented thereby of which
the corporation shall have notice and subject to such rules and regulations as
the Board of Directors may from time to time deem advisable concerning the
transfer and registration of certificates for shares of capital stock of the
corporation, the corporation shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books. Transfers of shares shall be made only on the books of the corporation
by the registered holder thereof or by his attorney or successor duly authorized
as evidenced by documents filed with the Secretary or transfer agent of the
corporation.
<PAGE>

7.4 RESTRICTIONS ON TRANSFER
------------------------

Any stockholder may enter into an agreement with other stockholders or with
the corporation providing for reasonable limitation or restriction on the right
of such stockholder to transfer shares of capital stock of the corporation held
by him, including, without limiting the generality of the foregoing, agreements
granting to such other stockholders or to the corporation the right to purchase
for a given period of time any of such shares on terms equal to terms offered
such stockholders by any third party. Any such limitation or restrictions on
the transfer of shares of the corporation may be set forth on certificates
representing shares of capital stock or notice thereof may be otherwise given to
the corporation or the transfer agent, in which case the corporation or the
transfer agent shall not be required to transfer such shares upon the books of
the corporation without receipt of satisfactory evidence of compliance with the
terms of such limitation or restriction.

7.5 NO FRACTIONAL SHARE CERTIFICATES
--------------------------------

Certificates shall not be issued representing fractional shares of stock.

7.6 FIXING RECORD DATE
------------------

The Board of Directors may fix in advance a date, not exceeding sixty (60)
days, nor less than ten (10) days, preceding the date of any meeting of
stockholders, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining any consent, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting, or adjournment thereof, or to any such allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange of
capital stock, or to give such consent, and in such case such stockholders and
only such stockholders as shall be stockholders of record on the date so fixed
shall be entitled to notice of, and to vote at, such meeting and any adjournment
thereof, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the corporation after any such record date fixed as
aforesaid.

In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation by delivery
to its registered office, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded.

7.7 STOCKHOLDERS OF RECORD
----------------------

The corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
<PAGE>

ARTICLE VIII

INDEMNIFICATION
---------------

8.1 IN GENERAL
----------

Each person who at any time is or shall have been a director, officer,
employee or agent of the corporation, or is or shall have been serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and his
heirs, executors and administrators, shall be indemnified by the corporation in
accordance with and to the full extent permitted by the Delaware General
Corporation Law as in effect at the time of adoption of this by-law or as
amended from time to time. No director of the corporation shall be liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the General Corporation Law of the
State of Delaware, or (d) for any transaction from which the director derived an
improper personal benefit. The foregoing right of indemnification shall not be
deemed exclusive of any other rights to which a person seeking indemnification
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise. If authorized by the Board of Directors,
the corporation may purchase and maintain insurance on behalf of any person to
the full extent permitted by the Delaware General Corporation Law as in effect
at the time of the adoption of this by-law or as amended from time to time.

ARTICLE IX

AMENDMENTS
----------

9.1 IN GENERAL
----------

Any provision of these by-laws may be altered, amended or repealed from
time to time by the affirmative vote of a majority of the stock having voting
power present in person or by proxy at any annual meeting of stockholders at
which a quorum is present, or at any special meeting of stockholders at which a
quorum is present, if notice of the proposed alteration, amendment or repeal be
contained in the notice of such special meeting, or by the affirmative vote of a
majority of the directors then qualified and acting at any regular or special
meeting of the board; provided, however, that the stockholders may provide
specifically for limitations on the power of directors to amend particular by-
laws and, in such event, the directors' power of amendment shall be so limited;
and further provided that no reduction in the number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
<PAGE>

SECRETARY'S CERTIFICATE OF ADOPTION OF BY-LAWS
OF
ATHERTON CAPITAL INCORPORATED

I, the undersigned, do hereby certify:

1. That I am the duly elected and acting Secretary of Atherton Capital
Incorporated, a Delaware corporation (the "Company").

2. That the foregoing By-laws constitute the By-laws of the Company as
adopted by the directors of the Company by written consent on March 10, 1997.

IN WITNESS WHEREOF, I have hereunto subscribed my name this 10th day of
March, 1997.

/s/ Arthur P. Brazy, Jr.
---------------------------------
Arthur P. Brazy, Jr.
Secretary

<PAGE>

________________________________________________________________________________
EXHIBIT 3.2(b)

AMENDED AND RESTATED BYLAWS

ATHERTON CAPITAL INCORPORATED

________________________________________________________________________________
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.............................................. 1

1.1 REGISTERED OFFICE.............................................. 1
1.2 OTHER OFFICES.................................................. 1

ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1

2.1 PLACE OF MEETINGS.............................................. 1
2.2 ANNUAL MEETING................................................. 2
2.3 SPECIAL MEETING................................................ 3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS............................... 3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................... 3
2.6 QUORUM......................................................... 4
2.7 ADJOURNED MEETING; NOTICE...................................... 4
2.8 VOTING......................................................... 4
2.9 WAIVER OF NOTICE............................................... 4
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING........ 5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.... 5
2.12 PROXIES........................................................ 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.......................... 6

ARTICLE III - DIRECTORS.................................................... 6

3.1 POWERS......................................................... 6
3.2 NUMBER OF DIRECTORS............................................ 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS........ 6
3.4 RESIGNATION AND VACANCIES...................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....................... 7
3.6 FIRST MEETINGS................................................. 8
3.7 REGULAR MEETINGS............................................... 8
3.8 SPECIAL MEETINGS; NOTICE....................................... 8
3.9 QUORUM......................................................... 8
3.10 WAIVER OF NOTICE............................................... 9
3.11 ADJOURNED MEETING; NOTICE...................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............. 9
3.13 FEES AND COMPENSATION OF DIRECTORS............................. 9
</TABLE>
<PAGE>

<TABLE>
<S> <C>
3.14 APPROVAL OF LOANS TO OFFICERS.................................. 10
3.15 REMOVAL OF DIRECTORS........................................... 10

ARTICLE IV - COMMITTEES.................................................... 10

4.1 COMMITTEES OF DIRECTORS........................................ 10
4.2 COMMITTEE MINUTES.............................................. 11
4.3 MEETINGS AND ACTION OF COMMITTEES.............................. 11

ARTICLE V - OFFICERS....................................................... 11

5.1 OFFICERS....................................................... 11
5.2 ELECTION AND TERM OF OFFICERS.................................. 12
5.3 REMOVAL AND RESIGNATION........................................ 12
5.4 VACANCIES...................................................... 12
5.5 CHAIRMAN OF THE BOARD.......................................... 12
5.6 CHIEF EXECUTIVE OFFICER........................................ 12
5.7 PRESIDENT...................................................... 13
5.8 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, VICE
PRESIDENTS..................................................... 13
5.9 SECRETARY...................................................... 13
5.10 CHIEF FINANCIAL OFFICER........................................ 14
5.11 OTHER OFFICERS AND EMPLOYEES................................... 14
5.12 SALARIES....................................................... 14

ARTICLE VI - INDEMNITY..................................................... 14

6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... 14
6.2 INDEMNIFICATION OF OTHERS...................................... 15
6.3 INSURANCE...................................................... 15

ARTICLE VII - RECORDS AND REPORTS.......................................... 15

7.1 MAINTENANCE AND INSPECTION OF RECORDS.......................... 15
7.2 INSPECTION BY DIRECTORS........................................ 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................... 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................. 16

ARTICLE VIII - GENERAL MATTERS............................................. 17
</TABLE>

-ii-
<PAGE>

TABLE OF CONTENTS
(Continued)

<TABLE>
<S> <C>
8.1 CHECKS......................................................... 17
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............... 17
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES......................... 17
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................ 18
8.5 LOST CERTIFICATES.............................................. 18
8.6 CONSTRUCTION; DEFINITIONS...................................... 18
8.7 DIVIDENDS...................................................... 18
8.8 FISCAL YEAR.................................................... 19
8.9 SEAL........................................................... 19
8.10 TRANSFER OF STOCK.............................................. 19
8.11 STOCK TRANSFER AGREEMENTS...................................... 19
8.12 REGISTERED STOCKHOLDERS........................................ 19

ARTICLE IX - AMENDMENTS.................................................... 20

ARTICLE X - DISSOLUTION.................................................... 20

ARTICLE XI - CUSTODIAN..................................................... 21

11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.................... 21
11.2 DUTIES OF CUSTODIAN............................................ 21
</TABLE>

-iii-
<PAGE>

AMENDED AND RESTATED BYLAWS

ATHERTON CAPITAL INCORPORATED

ARTICLE I

CORPORATE OFFICES
-----------------

1.1 REGISTERED OFFICE
-----------------

The registered office of Atherton Capital Incorporated (the "Corporation")
is Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle, State of Delaware. The name of the registered agent of
the Corporation at such location is The Corporation Trust Company.

1.2 OTHER OFFICES
-------------

The Board of Directors may at any time establish other offices at any place
or places where the Corporation is qualified to do business.

ARTICLE II

MEETINGS OF STOCKHOLDERS
------------------------

2.1 PLACE OF MEETINGS
-----------------

Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the Corporation.

2.2 ANNUAL MEETING
--------------

The annual meeting of stockholders shall be held each year on a date and at
a time designated by the Board of Directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the __________
of __________ in each year at ____.m. However, if such day falls on a legal
holiday, then the
<PAGE>

meeting shall be held at the same time and place on the next succeeding full
business day. At the meeting, directors shall be elected and any other proper
business may be transacted.

(a) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the board of directors, (B) otherwise properly brought before the meeting by
or at the direction of the board of directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
event that less than seventy (70) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice to be timely must
be so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his, her or its capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order for a stockholder to include information
with respect to a proposal in the proxy statement and form of proxy for a
meeting of stockholder, such stockholder must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
in accordance with the provisions of this paragraph (b), and, if he or she so
determines, he or she shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.

(b) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the Corporation who is entitled to vote in
the election of directors at such meeting and who complies with the notice
procedures set forth in this paragraph (c). Nominations by stockholders shall be
made pursuant to timely notice in writing to the Secretary of the Corporation in
accordance with the provisions of paragraph (b) of this Section 2.2. Such
stockholder's notice shall set forth (i) as to each person, if any, whom the
stockholder proposes to nominate for election or re-election as

-2-
<PAGE>

a director: (A) the name, age, business address and residence address of such
person, (B) the principal occupation or employment of such person, (C) the class
and number of shares of the corporation which are beneficially owned by such
person, (D) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nominations are to be made by the stockholder,
and (E) any other information relating to the nominee that is required to be
disclosed in solicitations of proxies for elections of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the 1934 Act
(including without limitation such nominee's written consent to being named in
the proxy statement, if any, as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving notice, the information required
to be provided pursuant to paragraph (b) of this Section 2.2. At the request of
the Board of Directors, any person nominated by a stockholder for election as a
director shall furnish to the Secretary of the Corporation such information
regarding the nominee as is required to be set forth in a stockholder's notice
of such nomination. No person shall be eligible for election as a director of
the Corporation unless nominated in accordance with the procedures set forth in
this paragraph (c). The chairman of the meeting shall, if the facts warrants,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he or she
should so determine, he or she shall so declare at the meeting, and the
defective nomination shall be disregarded.

2.3 SPECIAL MEETING
---------------

Special meetings of stockholders for any purpose or purposes may be called
at any time by the Chairman of the Board of Directors, the President or the
Board of Directors, but such special meetings may not be called by any other
person or persons.

2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------

All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called or (ii) in the case of
the annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders. No
business other than that specified in the notice may be transacted at a special
meeting, but any matter properly brought before an annual meeting may be
presented at such annual meeting. The notice of any meeting at which directors
are to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the Board intends to present for election.

2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------

Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to a stockholder
at his, her or its address as it appears on the

-3-
<PAGE>

records of the Corporation. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the Corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.

2.6 QUORUM
------

The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.

The stockholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.

2.7 ADJOURNED MEETING; NOTICE
-------------------------

When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

2.8 VOTING
------

The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).

Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.

2.9 WAIVER OF NOTICE
----------------

-4-
<PAGE>

Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the Certificate of Incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.

2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------

Stockholders may not take action by written consent in lieu of meeting but
must take actions at a duly called annual or special meeting.

2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------

In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.

If the Board of Directors does not so fix a record date:

(i) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.

(ii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.

A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.

2.12 PROXIES
-------

Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a

-5-
<PAGE>

written proxy, signed by the stockholder and filed with the secretary of the
Corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.

2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------

The officer who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the entire time
thereof, and may be inspected by any stockholder who is present.

ARTICLE III

DIRECTORS
---------

3.1 POWERS
------

Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the Certificate of Incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.

3.2 NUMBER OF DIRECTORS
-------------------

The authorized number of directors shall be as specified in the Certificate
of Incorporation. This number may be changed by a duly adopted amendment to the
Certificate of Incorporation.

No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.

3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------

-6-
<PAGE>

Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the ______
annual meeting next succeeding their election. Directors need not be
stockholders unless so required by the Certificate of Incorporation or these
Bylaws, wherein other qualifications for directors may be prescribed. Each
director, including a director elected to fill a vacancy, shall hold office
until his successor is duly elected and qualified or until his earlier
resignation or removal.

Elections of directors need not be by written ballot.

3.4 RESIGNATION AND VACANCIES
-------------------------

Any director may resign at any time upon written notice to the Corporation.
When one or more directors so resigns and the resignation is effective at a
future date, unless otherwise provided in the Certificate of Incorporation, a
majority of the remaining directors, although less than a quorum, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective.

Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:

(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the remaining directors, although less than a quorum, or by a sole
remaining director.

(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the Certificate of Incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.

If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then the President may call a
special meeting of stockholders in accordance with the provisions of the
Certificate of Incorporation or these Bylaws, or may apply to the Court of
Chancery for a decree summarily ordering an election as provided in Section 211
of the General Corporation Law of Delaware.

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------

The Board of Directors of the Corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.

-7-
<PAGE>

Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.

3.6 FIRST MEETINGS
--------------

The first meeting of each newly elected Board of Directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.

3.7 REGULAR MEETINGS
----------------

Regular meetings of the Board of Directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.

3.8 SPECIAL MEETINGS; NOTICE
------------------------

Special meetings of the Board of Directors for any purpose or purposes may
be called at any time by the Chairman of the Board, the President, the Secretary
or any two (2) directors.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail
facsimile, overnight courier or telegram, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
Corporation. If the notice is mailed, it shall be deposited in the United States
mail at least four (4) days before the time of the holding of the meeting. If
the notice is delivered personally or by telephone, facsimile, overnight courier
or telegram, it shall be delivered personally or by telephone or facsimile or to
the overnight courier or telegraph company at least forty-eight (48) hours
before the time of the holding of the meeting. Any oral notice given personally
or by telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or, if the meeting is to be held at the principal executive office of
the Corporation, the place of the meeting.

3.9 QUORUM
------

-8-
<PAGE>

At all meetings of the Board of Directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.

A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.

3.10 WAIVER OF NOTICE
----------------

Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the Certificate of Incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the Certificate of
Incorporation or these Bylaws.

3.11 ADJOURNED MEETING; NOTICE
-------------------------

If a quorum is not present at any meeting of the Board of Directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.

3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------

Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.

3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------

Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, the Board of Directors shall have the authority to fix the compensation
of directors.

-9-
<PAGE>

3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------

The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.

3.15 REMOVAL OF DIRECTORS
--------------------

Unless otherwise restricted by statute, by the Certificate of Incorporation
or by these Bylaws, any director or the entire Board of Directors may be
removed, only for cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.

No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.

ARTICLE IV

COMMITTEES
----------

4.1 COMMITTEES OF DIRECTORS
-----------------------

The Board of Directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the Corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors or in the Bylaws of the Corporation, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as

-10-
<PAGE>

provided in Section 151(a) of the General Corporation Law of Delaware, fix any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation), (ii) adopt an agreement of merger or consolidation under Sections
251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or (v) amend
the Bylaws of the Corporation; and, unless the board resolution establishing the
committee, the Bylaws or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.

4.2 COMMITTEE MINUTES
-----------------

Each committee shall keep regular minutes of its meetings and report the
same to the Board of Directors when required.

4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------

Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these Bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those Bylaws as are necessary to substitute the committee and its members for
the Board of Directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.

ARTICLE V

OFFICERS
--------

5.1 OFFICERS
--------

The officers of the corporation shall be a Chief Executive Officer, a
President, a Secretary, a Chief Financial Officer and such other officers as the
Board of Directors shall from time to time determine. Any

-11-
<PAGE>

two (2) or more offices may be held by the same person. None of the officers
need be a director, a stockholder of the corporation or a resident of the State
of Delaware.

5.2 ELECTION AND TERM OF OFFICE
---------------------------

The officers of the corporation shall be elected annually by the Board of
Directors at their first meeting held after each regular annual meeting of the
stockholders. If the election of officers shall not be held at such meeting of
the Board, such election shall be held at a regular or special meeting of the
Board of Directors as soon thereafter any may be convenient. Each officer shall
hold office until his successor is elected and qualified or until his death or
resignation or until he shall have been removed in the manner hereinafter
provided.

5.3 REMOVAL AND RESIGNATION
-----------------------

Any officer may be removed, either with or without cause, by a majority of
the directors then in office at any regular or special meeting of the Board; but
such removal shall be without prejudice to the contract rights, if any, of such
person so removed. Any officer may resign at any time by giving written notice
to the Board of Directors, to the President or to the Secretary of the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified herein, the acceptance of such resignation shall not be necessary to
make it effective.

5.4 VACANCIES
---------

A vacancy in any office because of death, resignation, removal, or any
other cause may be filled for the unexpired portion of the term by the Board of
Directors.

5.5 CHAIRMAN OF THE BOARD
---------------------

The Board of Directors may elect one (1) of the directors to be Chairman of
the Board. The Chairman of the Board, if such an officer be elected, shall, if
present, preside at meetings of the Board of Directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
Board of Directors or as may be prescribed by these Bylaws. If there is no
Chief Executive Officer or President, then the Chairman of the Board shall also
be the chief executive officer of the Corporation and shall have the powers and
duties prescribed in Section 5.7 of these bylaws.

5.6 CHIEF EXECUTIVE OFFICER
-----------------------

The Board of Directors shall elect a Chief Executive Officer. The Chief
Executive Officer may sign, with the Secretary or an Assistant Secretary or the
Chief Financial Officer, certificates for shares of stock of the Corporation the
issuance of which shall have been duly authorized by the Board of Directors.

-12-
<PAGE>

Subject to such supervisory powers, if any, as may be given by the Board of
Directors to the Chairman of the Board, if there be such an officer, the Chief
Executive Officer shall be the chief executive officer of the corporation and
shall, subject to the control of the Board of Directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He or she shall preside at all meetings of the stockholders and,
in the absence or nonexistence of a Chairman of the Board, at all meetings of
the Board of Directors. He or she shall have the general powers and duties of
management usually vested in the office of Chief Executive Officer of a
Corporation and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.

5.7 PRESIDENT
---------

The Board of Directors shall elect a President. The President may sign,
with the Secretary or an Assistant Secretary or the Chief Financial Officer,
certificates for shares of stock of the Corporation the issuance of which shall
have been duly authorized by the Board of Directors. The President shall have
the general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the Board of Directors or these Bylaws.

5.8 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, VICE PRESIDENTS
------------------------------------------------------------------

The Board of Directors may elect as officers of the corporation one (1) or
more Executive Vice Presidents, one (1) or more Senior Vice Presidents and one
(1) or more Vice Presidents, none of whom need be members of the Board of
Directors. Reference in this by-law to the term "Vice President" shall include
Executive Vice President, Senior Vice President and Vice President unless
otherwise specified. Any Vice President may sign, with the Secretary or an
Assistant Secretary, or the Chief Financial Officer, certificates for share of
stock of the corporation the issuance of which shall have been duly authorized
by the Board of Directors.

5.9 SECRETARY
---------

The Board of Directors shall appoint a Secretary who shall: (a) keep the
minutes of the meetings of the stockholders, the Board of Directors and
committees of directors, in one (1) or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (c) have charge of the corporate records; (d)
keep a register of the post office address of each stockholder, director or
committee member which shall from time to time be furnished to the Secretary by
such stockholder, director or member; (e) sign with the Chief Executive Officer,
the President, or a Vice President, certificates for shares of stock of the
Corporation, the issuance of which shall have been duly authorized by resolution
of the Board of Directors; (f) have general charge of the stock transfer books
of the Corporation; and (g) in general, perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to the Secretary by the Chief Executive Officer, the President or the Board of
Directors. The Secretary may delegate such details of the performance of duties

-13-
<PAGE>

of his or her office as may be appropriate in the exercise of reasonable care to
one (1) or more persons in his or her stead, but shall not thereby be relieved
of responsibility for the performance of such duties.

5.10 CHIEF FINANCIAL OFFICER
-----------------------

The Board of Directors shall elect a Chief Financial Officer who shall be
the chief financial officer of the Corporation. The Chief Financial Officer
shall have the custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Chief Financial Officer shall disburse the funds
of the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chairman of the Board,
the Chief Executive Officer, the President and the Board of the Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all the Chief Financial Officer's transactions as Chief Financial Officer and
the financial condition of the Corporation.

5.11 OTHER OFFICERS AND EMPLOYEES
----------------------------

The Board of Directors may appoint such other officers of the Corporation
as it deems appropriate.

5.12 SALARIES
--------

No officer shall be prevented from receiving a salary or other compensation
by reason of the fact that he or she is also a director of the Corporation.

ARTICLE VI

INDEMNITY
---------

6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------

The Corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the Corporation. For purposes of this Section 6.1, a "director" or
"officer" of the Corporation includes any person (i) who is or was a director or
officer of the Corporation or any subsidiary, (ii) who is or was serving at the
request of the Corporation as a director or officer of another Corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a Corporation which was a

-14-
<PAGE>

predecessor Corporation of the Corporation or of another enterprise at the
request of such predecessor Corporation.

6.2 INDEMNIFICATION OF OTHERS
-------------------------

The Corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the Corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the Corporation, (ii) who is or was serving at the request of the
Corporation as an employee or agent of another Corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
Corporation which was a predecessor Corporation of the Corporation or of another
enterprise at the request of such predecessor Corporation.

6.3 INSURANCE
---------

The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another Corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.

ARTICLE VII

RECORDS AND REPORTS
-------------------

7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------

The Corporation shall, either at its principal executive office or at such
place or places as designated by the Board of Directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.

Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records

-15-
<PAGE>

and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.

The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

7.2 INSPECTION BY DIRECTORS
-----------------------

Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
Corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.

7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------

The Board of Directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the Corporation.

7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------

The Chairman of the Board, the Chief Executive Officer, the President, any
Vice President, the Treasurer, the Secretary or Assistant Secretary of the
Corporation, or any other person authorized by the Board of Directors or the
president or a vice president, is authorized to vote, represent, and exercise on
behalf of this Corporation all rights incident to any and all shares of any
other Corporation or Corporations standing in the name of the Corporation. The
authority granted herein may be exercised either by such

-16-
<PAGE>

person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.

ARTICLE VIII

GENERAL MATTERS
---------------

8.1 CHECKS
------

From time to time, the Board of Directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.

8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------

The Board of Directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.

8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------

The shares of a Corporation shall be represented by certificates, provided
that the Board of Directors of the Corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the Chairman or Vice-Chairman of
the Board of Directors, or the President, Chief Executive Officer or Vice-
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary of the Corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.

-17-
<PAGE>

The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.

8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------

If the Corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.

8.5 LOST CERTIFICATES
-----------------

Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal represen tative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.

8.6 CONSTRUCTION; DEFINITIONS
-------------------------

Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.

8.7 DIVIDENDS
---------

-18-
<PAGE>

The directors of the Corporation, subject to any restrictions contained in
the Certificate of Incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the Corporation's
capital stock.

The directors of the Corporation may set apart out of any of the funds of
the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.

8.8 FISCAL YEAR
-----------

The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.

8.9 SEAL
----

The corporate seal shall have the name of the Corporation inscribed thereon
and shall be in such form as may be approved from time to time by the Board of
Directors.

8.10 TRANSFER OF STOCK
-----------------

Upon surrender to the Corporation or the transfer agent of the Corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, assuming compliance with
applicable securities laws, it shall be the duty of the Corporation to issue a
new certificate to the person entitled thereto, cancel the old certificate, and
record the transaction in its books.

8.11 STOCK TRANSFER AGREEMENTS
-------------------------

The Corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.

8.12 REGISTERED STOCKHOLDERS
-----------------------

The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person,

-19-
<PAGE>

whether or not it shall have express or other notice thereof, except as
otherwise provided by laws of Delaware.

ARTICLE IX

AMENDMENTS
----------

The original or other Bylaws of the Corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
Corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.

ARTICLE X

DISSOLUTION
-----------

If it should be deemed advisable in the judgment of the Board of Directors
of the Corporation that the Corporation should be dissolved, the Board, after
the adoption of a resolution to that effect by a majority of the whole Board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.

At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the Corporation shall be dissolved.

Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in accor
dance with Section 103 of the General Corporation Law of Delaware, the
Corporation shall be dissolved. If the consent is signed

-20-
<PAGE>

by an attorney, then the original power of attorney or a photocopy thereof shall
be attached to and filed with the consent. The consent filed with the Secretary
of State shall have attached to it the affidavit of the Secretary or some other
officer of the Corporation stating that the consent has been signed by or on
behalf of all the stockholders entitled to vote on a dissolution; in addition,
there shall be attached to the consent a certification by the Secretary or some
other officer of the Corporation setting forth the names and residences of the
directors and officers of the Corporation.

ARTICLE XI

CUSTODIAN
---------

11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------

The Court of Chancery, upon application of any stockholder, may
appoint one or more persons to be custodians and, if the Corporation is
insolvent, to be receivers, of and for the Corporation when:

(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or

(ii) the business of the Corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the Corporation that the required vote for action
by the Board of Directors cannot be obtained and the stockholders are unable to
terminate this division; or

(iii) the Corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.

11.2 DUTIES OF CUSTODIAN
-------------------

The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the Corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.

-21-

<PAGE>

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Atherton Capital Incorporated:

We consent to the use of our report included herein and to the reference to
our Firm under the heading "Experts" in the Prospectus.

KPMG Peat Marwick LLP

San Francisco, California
June 2, 1998

<PAGE>

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